Solving climate change is the biggest opportunity for entrepreneurs in our generation. In fact, the planet’s best hope lies in unleashing startups to unbundle and “unscale” the global energy industry.
So far, almost all the conversation and policy-making around climate change has focused on austerity — some mix of sacrifice and grudging duty. That came together in the Paris accords, which aimed to impose limits on carbon. Austerity marks the language of politicians who line up against climate change policy.
The argument instead needs to be about prosperity, and how we can help entrepreneurs seize the moment. That will require “systems thinking” that lines up technology, finance and policy behind startups and innovation in energy.
We need to help energy ride the same software-driven dynamic that let Uber disrupt the entrenched taxi industry in the 2010s or Skype to fluster the regulated, protected international telephone business in the 2000s.
When that kind of unscaling happens to an industry, the sector becomes massively more efficient and nimble, churning out innovations at a pace that makes many incumbents look like zombies. An unscaled energy industry will create jobs and boost economic growth — and, most importantly, curtail the burning of carbon fuels.
It’s already obvious progress won’t be fast enough without luring entrepreneurs and venture capital back into this sector. In the U.S., total federal funds spent on energy research and development come to less than 2 percent of federal R&D spending, and private investment in R&D by big energy companies is even worse — just 0.3 percent of revenues.
An unscaled energy industry will create jobs and boost economic growth — and, most importantly, curtail the burning of carbon fuels.
Talent and investment stay away from energy because governments, which often fail to think long-term, keep tripping over policy design that would support innovation. Recent news about one of the most interesting companies in energy, SolcarCity, provides an example.
SolarCity was founded in 2006 by Lyndon and Peter Rive with guidance from Elon Musk. The company applied technology, design and business-model innovation to develop new solar power systems that made economic sense for homeowners to install in their homes based on net metering policies. By last year, the company was adding 12,000 customers a month, employed 12,000 people, and was worth around $6 billion.
But earlier this year, regulators in Nevada gave in to pushback from the state’s entrenched utility, NV Energy, and significantly dropped the price paid to homeowners who sell excess energy generated by their rooftop panels back to the utility. The price drop was so damaging to solar customers, SolarCity decided to pull out of Nevada, laying off 550 workers in the process. This is a disappointing development.
However, I remain optimistic about the longer term given how quickly we are seeing other industries like hospitality, transportation, and retail undergo change.
It can be hard to believe that what Uber did to taxis can be done to a monolithic industry like power and energy, broadly. But unscaling is the profound and powerful force reshaping every sector of business and society.
It’s the reason Warby Parker can come out of nowhere and challenge the biggest, oldest eyewear companies on the planet, or why Airbnb can now offer more rooms than the biggest hotel chains. Khan Academy and a number of startups are using the forces of unscale to challenge the education system.
The advantages of “economies of scale” are disappearing, and the new upstarts are able to create better customer experiences than incumbents and scale them. The availability of new platforms for computing, manufacturing, logistics, finance and access to consumers make it possible for small, focused companies to build products and reach global markets with very little capital and in relatively little time.
An innovative upstart can iterate quickly, connect to customers, and offer disruptive products and services that reinvent industries — even old ones. At the turn of the century, who would’ve thought that startups might take on generations-old auto companies or insurance institutions? But unscaled newcomers like Tesla and Oscar are showing how it’s done, and making those industries compelling again.
The advantages of “economies of scale” are disappearing, and the new upstarts are able to create better customer experiences than incumbents and scale them.
Over the next 20 years, new platforms will get built that will enable unscaling of the energy sector. Tesla is developing home batteries that will, for the first time, allow homeowners to cost-effectively store excess energy from solar panels, completely changing the dynamics of electric service.
GridCo Systems (one of our energy investments), and Varentec are helping the electric grid work more like telecommunications networks, allowing power to move nimbly through the system to accommodate things like solar panels, electric vehicles, and home batteries. As these platforms get built, new small and focused — and unscaled — companies that we can’t even conceive of yet will be built on top, completely transforming the way we buy and use energy.
Incumbent power companies will play an important role in this, too. Regulators have to allow utilities to invest in new technologies, and shareholders have to give utilities permission to innovate and take risks.
Their role needs to evolve from operating mammoth power plants and transmission grids to operating software-powered platforms that interconnect the unscaled power solutions in homes and small businesses. Just as anyone can now be a hotelier because of Airbnb, in a decade anyone will be able to be a power company once storage becomes a reality.
In an unscaled era, the mini power plant in a home or small business is better, cheaper, cleaner and more resilient than the next massive power plant. Customers will have choices, and if new energy technologies are better, cheaper and cleaner than old ones, that’s what customers will choose.
Some of the smartest business people are recognizing the potential. Bill Gates unveiled his Clean Tech Initiative last fall to try to help catalyze investment in the sector. That’s great, but not enough. I’ve been involved in investing and policy in energy for more than a decade, and I haven’t seen many inspiring entrepreneurs take advantage of this opportunity. And until we get policy-technology-finance systems thinking, breakthrough startup ideas aren’t going to surface.Featured Image: Jes/Flickr UNDER A CC BY-SA 2.0 LICENSE