Will Sustainability become the Feared Equalizer?

Why is the price of oil still hovering around $100 per barrel, if global demand has fallen and the supply of alternative energy sources, including shale and renewables, are increasing? Could it be that commodity traders are reacting to a new series of less visible market forces? 

We know that whenever Iran talks up their nuclear energy aspirations or Israel fires missiles into Syria, oil prices tend to rise or as of late, not drop by much. There is also US Congress’ lack of a comprehensive long term energy policy that has kept a tight rein on infrastructure investments such as charging stations for electric vehicles. However, as I discovered recently, there is yet another force at play, one that is far more complex than society is prepared to confront today and which will surely cause the price of oil and similar fossil fuels to double, if not triple in price, in the coming decades. This invisible force is referred to as sustainability.

What exactly is sustainability? In simple terms, sustainability is about replacing a resource so it can be used again and again. Terms like ‘recycling’ trash or producing ‘renewable energy’ are commonly associated with the practice of sustainability or the act of sustaining an activity in perpetuity with minimal environmental damage. Perhaps the best example of sustainability are e-books because they never wear out from one user to another and can be reproduced millions of times from one stored copy. Nevertheless, sustainability is more than just a repeatable process. It is also a culture, an attitude, a way of thinking that inspires inherent behavioral changes on socially-acceptable consumption practices.

MIT’s Sustainability Summit
At MIT’s Sustainability Summit last month, I came away with a deeper appreciation for what sustainability can mean to different people, especially how it can motivate them to change their habits and the habits of others, and yet, I could not help feel discouraged by the global indifference and the immense size of the problem. What set me over the edge was a powerful video called, ‘The Art & Science of Chasing Ice’ produced by James Balog on how our north and south polar ice caps are melting away from the amount of black soot dispersed into the atmosphere from our factories and automobiles. If this visual does not do if for you then perhaps a TED video by Charles Moore on the Great Pacific Garbage Patch may bring it home. The visuals are truly stunning, rude awakenings of what a planet with 7 billion individuals are capable of doing wrong.

With the UN’s projected 9.1 billion people by 2050, one can be absolutely certain that issues of sustainability will be front and center in the daily livelihood of every individual and entity. Why? …for the simple reason that our planet resources are limited and our current lifestyles and diverse cultures have yet to align and adapt to a sustainably-friendly behavior.

After attending the MIT Summit, I concluded that the efforts to align sustainable priorities are not only a discombobulated entanglement of disparate, self-appointed initiatives but also an odd assortment of potentially conflicting outcomes. To get an idea,  take a look at two opposing car ownership attitudes by city dwellers.  While the new normal has shifted favorably to shared auto usage among urbanites in developed countries (i.e. US – zipcar.com), in emerging countries (i.e. Brazil, China), new consumers expect to own their own car as soon as they move into a city!

Walmart vs WholeFoods
Another similar example of conflicting outcomes was visible at The Atlantic Magazine press conference in Washington DC on December 4, 2012. A forum of experts showcased the sustainability policies of two retail food companies, Walmart and WholeFoods.  While both companies work closely with their suppliers to recycle waste and introduce biodegradable packaging, Walmart’s Beth Keck, Senior Director of Sustainability, explained that Walmart provides their tight-fisted consumers with environmentally friendly products and chooses not to educate them on how they should change their consumption attitudes toward a more wholesome sustainable lifestyle.

In curious contrast, WholeFoods’ counterpart, Kathy Loftus, Global Leader, Sustainable Engineering & Energy Management, stated that with one-tenth the number of retail outlets as Walmart, WholeFoods is deeply committed to educating its employees and the communities they serve. The company teaches sustainability as a shared problem that begins with each and every consumer. WholeFoods believes that the improved knowledge on how one’s food is handled and prepared can help consumers make better choices and therefore lead healthier lives that will result in fewer medical issues. The money saved from fewer doctor’s visits and drugs, for instance, could justify WholeFood’s higher prices, …which explains in part why Walmart with its cadre of low-priced, branded, processed food suppliers has avoided engaging directly with their consumers.

Will the term ‘sustainability’ just become another commonly used marketing term such as ‘green’, ‘organic’, and ‘hormone-free’ that companies can push at will to meet their own corporate business agendas?  …maybe not this time.

A Key Driver – Shareholders
Fortunately the investment community is making meaningful strides with shareholders and CEOs. According to Sustainalytics, a Boston-based firm, companies are eager to disclose their annual ESG scores (Environmental Social and Governance), a metric used to measure best practices.  A total of 3,600 corporations globally have signed on since 1992, but as Annie White, their Research Products Manager noted, they have only scratched the surface with over 40,000 public companies still remaining.

Driving the increasing interest for ESG scores are concerned shareholders who fear that unmanaged risks or ‘blind spots’ could unexpectedly pull a global company down to its knees as has happened with BP’s Gulf oil spill of 2006, Foxconn’s child labor practice that affected Apple earlier this year and the five garment factories for European and American branded clothing that collapsed in Bangladesh this month. With good reason, shareholders are concerned that similar disasters will become more commonplace and that reactionary foreign government retaliation could put them out of business.

According to Katie Grace, a Program Manager involved with the ‘Initiative for Responsible Investing’ at the Harvard Kennedy School, local governments do not have to wait for a catastrophe to legislate changes but rather can take a proactive role by setting project specific policies. Regionally, for example, they can rezone areas to attract private sector investments. They can also set standards such as LEED, which is used for certifying eco-buildings. For social projects, governments can issue ‘green bonds’ or payment guarantees for investment funds (i.e. Social Impact Bonds).  Some mayors like Philadelphia’s Michael Nutter have adopted these proactive recommendations with their sustainability efforts and are starting to see positive results.

The City of Philadelphia
Katherine Gajewski, Philadelphia’s Sustainability Director, a new position also held at over 115 municipalities across the US, spoke of her challenges working within an entrenched bureaucracy of over 22,000 public employees, most of whom are reluctant to change. Her reprieve has been her frequent conference calls with her 115 peers who openly share their best and worst practices. Their collective list of ideas has grown as the group continues to innovate together, while making most of their ideas up as they go along.

Some interesting cases that have already crossed Gajewski’s desk might surprise you. For example, an Enterprise Car Rental operation in an industrial section of Philadelphia was paying $400 per month for their water bill but was costing the City millions of dollars to purify their share of dirty runoff from their car lots. Eventually, the situation was rectified but not until Gajewski ran the numbers to show the disproportionality between what Enterprise was paying for their office water usage and the cost to clean up its runoff.

Just how many other industrial installations are out there in a typical city like Philadelphia where a company unwittingly gets away with paying a small fee to use a common service but whose operations account for a substantial cost of clean up? …probably a lot!

Gajewski’s job as a Sustainability Director requires more people skills than know-how. She must craft alignments of interest among internal groups to achieve meaningful consensus. Perhaps most important, her role as director and facilitator is to refrain from becoming too preachy and be willing to dole out credit to each participant. Easier said than done, Gajewksi knows that sustainability is a shared task that succeeds when everyone is on board.

As more Sustainability Directors like Gajewski identify similar imbalances in their respective cities, the idea of charging the same consumer for both usage and their share of the cost of cleanup will become more widely accepted. …and herein lies the reason why fossil fuel prices will continue to rise for years to come.

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Below is a summary of Best Practices that were shared during MIT’s Sustainability Summit.

Best Practices

  1. At a university-run, trash audit, MIT students sieved through a months worth of the university’s garbage to discover that of the 2.5 tons of trash collected, 500 pounds was food waste while the remaining 90% could be recycled! The visual impact of over $11.4 billion of trash that could be recycled in the US alone inspired one student to launch a 30-day waste challenge on https://www.facebook.com/30DayWasteChallenge where Facebook friends could commit to ‘be inconvenienced by their trash’ by carrying the trash they personally generate throughout their day for a 30-day period.
  2. Offering consumers a list of prices for the same product but packaged with different levels of biodegradable materials would help bring to light the importance of recycling.
  3. Wirelessly integrating a soda vending machine with a recycle bin located nearby could encourage consumers to recycle their containers.  Consumers would pay, say two dollars and fifty cents, for a soda and receive a one-dollar refund on their university credit card once the soda can was disposed of in the appropriate recycle bin within the allotted time.
  4. ‘Rewire’ individuals at opportune times so their behavioral changes continue well after a recycling program or contest. For example, students can be impacted for behavioral change during a time of transition such as the beginning of a semester.  Recycling contest rules would be established at the start of the semester and monitored throughout the year.
  5. The crop of graduating students who enter the workforce concerned about sustainability issues will inspire a new set of hiring qualifications. Already companies like WholeFoods have changed their hiring criteria to reflect their corporate goals for sustainability.
  6. Teaching children in lower school to become advocates for a sustainable future is the most effective use of funds for behavioral change. Not only will these youngsters represent the future of our planet but their unbound audacity to correct adults who forget to recycle would deliver a priceless message with an impactful and lasting effect.
  7. A practical solution launched this year in California involves a utility tax on a consumer’s bill that is merely collected by the utility company and paid directly into a Global Educational Fund for educational initiatives. The tax removes the utility’s burden of financing similar programs for its sector and uses the utilities billing capacity as a pass-through.
  8. WholeFoods spends time in Washington DC convincing lawmakers that refrigeration codes need upgrading.  Currently stores are allowed to have open refrigeration, which according to a WholeFoods spokesperson, Kathy Loftus, spends considerably more energy than if the same refrigerator had a door.  Another sustainable tip from WholeFoods is the wider use of ships to transport goods rather than trucks. According to Loftus, ships have a lesser impact on the environment than trucks.

© 2013 Tom Kadala

A Modern Day Gold Rush for a US Utility Company

On the Saturday after Hurricane Sandy had ravaged the New Jersey coast line, David Crane, the CEO of NRG, Inc. a New Jersey based Fortune 300 utility company, sat in his candle lit office waiting for a group of Japanese businessmen to arrive. On the agenda was the proposed construction of a replacement nuclear plant in Fukushima. As they entered his office, Crane noted their expression of disbelief and expected to hear more stories about the storm’s extensive damage. Instead his Japanese guests expressed how stunned they were to see transmission lines elevated on wooden poles throughout the State of New Jersey. What had caught their attention was the startling reality that the electrical infrastructure in America was truly obsolete.

Crane avoided expanding on the root causes of America’s infrastructure malaise for fear of losing their business. He chose not to tell them how complacent the US utility industry had become over the years nor how US consumers often take their reliable electricity service for granted. However, after Sandy, nothing would be the same. The status quo for both CEO and consumer would change forever creating an unprecedented opportunity for disruptive innovation.

MIT Energy Conference
At a recent two-day energy conference held at MIT, Crane in his unabashed, straight forward style, bluntly declared in front of a packed auditorium that America’s command and control utility business model was at the end of its useful life. The centralized grids used to service cities and towns would one day be replaced by independent mini-grids fueled by an assortment of readily available renewable energy sources such as wind and solar. Some in the audience acknowledged that it would only be a matter of time before technological breakthroughs would enable neighborhoods to produce their own power.

One such example of a potentially disruptive technology was presented at the conference by Abengoa Solar USA, a Spanish-based manufacturer of Concentrated Solar Power (CSP) plants. Just like the name suggests, these plants use mirrors to concentrate multiple sunlight beams toward a tower filled with a special fluid that is capable of reaching temperatures near 500℃ or 5 times hotter than the energy needed to boil water. During the day, some of the fluid’s heat energy generates power from steam turbines, while the remainder is stored for later use, (i.e. night hours or cloudy days). Between its extended energy storage capabilities and its ongoing innovative design enhancements, the Spanish company’s CSP plants are expected to compete with natural gas and coal on a price basis by 2020. …not bad for an electrical power source that requires a modest upfront capital cost (that has already dropped by 60% so far) and a near-zero operating cost extended over a 30 to 40 year lifespan!

As CSP and other similar renewable technologies continue to evolve, behemoth utility companies like NRG are preparing for a different future, one with less coal and more natural gas. At first glance, the transition has improved their public image from the 30% reduction in CO2 emissions. However, a closer look tells a different story. Utility companies converted to natural gas because they are betting that the soon-to-be, wide use of electric vehicles or EVs will breathe new life into the utility industry’s otherwise dying existence.

Just as air conditioners accounted for nearly 25% of power consumption decades ago, EVs are expected to have an even greater effect. First, large utilities like NRG will service fuel stations the same way oil companies have tended to their branded gas stations. However, unlike gasoline that can be stored for later use, electricity must be consumed at the same time it is produced. This difference will pose various peak demand challenges such as managing unpredictable recharging schedules from a disparate consumer base who at any given moment could plug-in for a boost.

Charging stations will offer a far different experience than what consumers are used to. For example, a trip to a Walmart might include self-operated charging stations located in a parking area where drivers can plug-in their vehicles before shopping. For customers in a hurry, charging stations may resemble a large dealership where leased EVs would be swapped or batteries exchanged for a freshly charged set. Perhaps a Zipcar-like self-serve business model with fully-charged EVs parked throughout a city could integrate an online reservation process with a smart phone App to offer a keyless activation experience.

Pricing models will probably resemble that of cell phones where a flat rate monthly subscription for say $89 would allow unlimited charges or exchanges at member stations. However, the success of these subscription models will depend on the size of the subscriber base. In California, for example, where local government support is strong, the number of EV owners participating in a fixed monthly rate pilot has only attracted 400 EV owners, well below the break even levels of 5,000 EVs needed to support a meaningful network of charging stations.

As the economy picks up, Crane and others believe that an increase in charging options along with green energy tax breaks will give consumers more reasons to tryout an EV. For NRG and other utility companies who are also EV advocates, the race to supply charging stations has only just begun. To get a jump on their competition, NRG’s board recently approved a $100 million investment to build out recharging stations in California where the adoption of EVs currently shows the greatest promise.

How significant is the size of NRG’s investment?  A glance at their income statement shows that a $100 million investment represents about three times what the company allocated for traditional R&D expenses in 2012. In fact, since 2010, NRG’s R&D budget has declined by nearly 20% annually (from $55m in 2010 to $36m in 2012). Was it the unsettling experience with hurricane Sandy or the lack of government energy policies that pushed Crane to the brink of innovation and reinvention? Either way, Crane has done what so many American pioneers did during the historic mid-1800‘s Gold Rush. Like them, he set his sights westward to California’s EV ‘gold’ in search of a better life for NRG.

© 2013 Tom Kadala

Emerging Digital Wallets

Did it ever occur to you that some day you may have to pay extra for the cash stashed in your wallet?  Well, with the emergence of the digital wallet where daily transactions happen with a tap or wave of a registered device, merchants may soon opt to stop accepting cash or actually charge extra for cash payments!  Going ‘cashless’ may offer immediate efficiency benefits to society but over the long term, it could also change the landscape of global currencies altogether.

For centuries cash has been the life-blood of economies allowing buyers and sellers to exchange goods and services both locally and across borders, based on exchange rates that compare their respective buying powers. For many countries including the US, cash is a symbol of national pride. It not only represents the collective success of a nation among nations but also offers privacy and control of how we choose to spend it.  With more and more disruptive technological breakthroughs looming in this space, one might wonder what other trends could emerge when the physical evidence of hard currency is reduced to nearly-invisible electronic digits.

Today’s Technology
Electronic fund technology is founded upon on an ongoing convergence between established banking services and emerging smart gadgets.  At present two trends are battling for market dominance.  The first trend expands upon available credit card services (the lower hanging fruit) and focuses on increasing the number of possibilities where credit cards can be easily transacted.  Two emerging players include Square (www.square.com) and iZettle (www.izettle.com).  Both companies offer free credit card readers that attach to smart devices (i.e. Iphone and Android phones), hence, allowing both merchants and private individuals to transact anywhere and at anytime.  This space is already experiencing competition from Barclay Bank’s PingIt.  Unlike the other two companies mentioned, PingIt eliminates the need to use a physical credit card by offering its British clients the ability to transact using registered mobile  numbers.

The second trend supports contactless transactions where a buyer taps or waves a device that is registered with one or more credit or debit cards.  Based on RFID technology, a company such as LAKS, a UK-based watch manufacturer, offers an elegant wrist watch (www.watch2pay.com) with an imbedded chip that can be waved near a special reader for every day purchases.  The convenience of carrying an indiscriminate digital wallet on one’s wrist for purchases under $20 is both fashionable and practical. (It could also be just what wrist watch manufacturers like LAKS will need to revive their slumping industry.)  Mobil Corporation offers SpeedPass (www.speedpass.com) for gas and grocery purchases at participating Mobil stations, while AT&T and Verizon are developing ISIS (www.paywithisis.com), a grocery store application that registers a purchase at the time the buyer pulls the product off the shelf.

Both trends offer immediate benefits.  For cardholders, the time saved from waiting in line at a counter will encourage early adoption, while for merchants, the convenience of not being tied to a fixed cash register to close a sale can offer more possibilities.  Just the elimination of handling cash on a daily basis from the US Treasury through to the consumer amounts to huge savings.  A 2008 McKinsey Consulting study highlighted that Europe annually spends between 60-100 billion euros to process cash payments, which include bills and coins.  However, as money goes digital, the potential ripple effects caused by the ongoing convergence process of proven technologies could also become a nasty wake up call among elected officials.  Their recent inability to manage public funds effectively could trigger a public reaction to convert a seemingly harmless technological advancement into a global explosion of digital currencies.  Just think.  A similar phenomenon occurred when the number of TV channels exploded after the introduction of cable and satellite services.

Imagine if…
Imagine a world where corporations issued their own digital currency that could be accepted not only in their stores but also at their participating partner establishments.  For example, an individual might earn credits with Walmart (or even a list of other businesses) that would be directly deposited into their digital wallet from their monthly wages with perhaps a 10% limit.  Similar to credit card loyalty points, they might receive additional credits from competing businesses or gain special advantages when participating in a coupon-driven purchase program. Participating consumers with Walmart credits, for example, could spend these credits at Walmart or with any other strategic partners within Walmart’s group.

As the adoption process continues among buyers, a normal progression might be that clusters of related companies agree on accepting one common currency for the entire group.  Controls such as a $20 per transaction limit could help limit abuse. If a buyer did not have enough credits, they could easily exchange one currency for any other based on daily exchange rates governed by a realtime bid and ask system determined by other users.

Not farfetched…
Note that this vision of the emergence of corporate-supported currencies is not farfetched, since it combines elements from proven technologies and programs currently in use, including airline frequent flyer point systems, Skype’s low amount transaction policies, PayPal’s seamless exchange rates for international money transfers, and Google’s keyword bidding process.  When proven programs such as these converge, new ideas emerge that have a greater chance of succeeding.

The implications of a world with hundreds of possible currencies creates numerous opportunities for corporations looking to lower currency risk, share payroll expenses with participating partners, and introduce bonafide loyalty programs.  Less fortunate will be elected officials who will face tough challenges from having less control of the money supply and, possibly, their voting constituents.