With increasing global demand for energy, tightening supply constraints and environmental concerns pressuring traditional energy sources, the brightest business minds are needed to commercialize the latest technological developments made in alternative energy, says Jigar Shah, the 36-year-old founder of SunEdison, a Maryland-based developer of solar electricity power plants.
In 2003, just out of business school, Shah pioneered a model enabling real estate owners to install solar panels on their buildings without having to invest any money upfront if they agree to buy cheap energy later. That strategy helped SunEdison turn into a venture capitalist's success story: In 2009, it was acquired for US$200 million by MEMC, a semiconductor and solar panel manufacturer. That success, Shah argues, only scratches the surface of the opportunities in the energy sector.
In addition to his work at SunEdison, Shah is head of The Carbon War Room, a nonprofit climate change organization founded by the Virgin Group's Richard Branson, offering policy advocacy and business mentoring for alternative energy companies.
Shah was the keynote speaker at the recent 2010 Wharton Energy Conference. In a discussion with Arabic Knowledge at Wharton, Shah outlined his advice to entrepreneurs and the next generation of business leaders interested in energy.
An edited transcript of the conversation follows.
Arabic Knowledge at Wharton: Where should entrepreneurs focus their efforts in the energy sector?
Jigar Shah: The energy business is the largest wealth creation sector on the planet. If you are an entrepreneur and you are smart, this is where you should be. But one of the biggest gaps is in financial products. We do not yet have a set of financial products that would allow people to move forward with projects in all technology areas. For example, there is no residential financial product that I can sell your mother in the energy efficiency space. That is a big gap. More broadly, technology is great, and hundreds of technologies exist, but they are not being implemented because the right financing products are not available.
Arabic Knowledge at Wharton: So is most of the opportunity now in business process improvements and financial products, or are there still technology startups that make sense?
Shah: The question isn't one more than the other. They both need to exist. Lots of new technology companies exist, but to date there are not enough people to do the business process improvements.
Arabic Knowledge at Wharton: What are some of the most important innovations to look out for on the technology side?
Shah: Some of the biggest innovations are in fuel cells, storage, biofuels, solar thermal energy production, small wind turbines and the smart grid. Lots of cool things are happening in electric vehicles. There are also important areas that are not as well known, for example, more efficient airplanes and internal combustion engines. In water, areas like [smart metering and buildings] … are interesting. Providing clean water in India is another new market.
Arabic Knowledge at Wharton: What other opportunities are available in emerging markets?
Shah: There has been a decade of growth in communications technology in Africa. Today, 70% of people in Africa have phones. That means there are 485 million people with phones, but without access to energy to recharge them. They are paying between US$2.00 and US$2.50 per kilowatt hour, and so we are seeing huge interest now in large-scale renewable energy in that area.
Other opportunities include initiatives like Desertec, where the goal is to produce energy in North Africa and transmit it to Europe. This is a big change. There, they are using thermal technologies, not just traditional photovoltaic cells.
There are a lot of emerging markets where entrepreneurs are playing a big role. A colleague of mine is providing telecom towers with solar power for 20% less cost than those equivalent operating on diesel power.
Arabic Knowledge at Wharton: Are there any energy solutions being developed in the Middle East that you're following and that entrepreneurs and investors should be paying attention to?
Shah: Because of low-cost energy in the Middle East, most of the innovation is happening outside the region. The biggest opportunities are in energy and water efficiency projects where information can be collected and used to greatly reduce waste. Many of these technologies are available to be licensed, but need to be modified for use in the Middle East and local conditions. There are some positive developments for Middle East entrepreneurs. Angel investing seems to have been identified as a problem that is being addressed by the high-net-worth community from The Cooperation Council for the Arab States of the Gulf (GCC).
Arabic Knowledge at Wharton: In the Middle East, a number of alternative energy projects have been launched by governments — zero-carbon Masdar City in Abu Dhabi being one of them. What do you make of such initiatives? Are they creating opportunities for entrepreneurs?
Shah: The motivation behind such efforts is genuine, but there is a huge shortage of expertise even to evaluate technologies coming from outside the GCC. Therefore, there is frustration from both sides. The sellers of technologies have invested heavily in local representation and exhibit at trade shows. The GCC countries have also invested heavily in new educational institutions and technical expertise.
The GCC needs help from non-governmental organizations to eliminate waste from the billions of dollars of subsidies for local energy usage in their countries. If the GCC could bring in "best in class" air conditioning, water technologies, continuous commissioning systems and so on, they would receive a short payback just on the savings on fossil fuel subsidies. The GCC countries subsidize local consumption of fossil fuels to the tune of 80%, depriving future generations of the wealth that could be derived from those sales at global market prices.
Arabic Knowledge at Wharton: A number of Middle Eastern countries are also interested in promoting alternative energy development. How would you approach a government about a partnership, if you were a company in the field? What are the issues that companies should be aware of when seeking such partnerships?
Shah: These are difficult questions to answer. The GCC countries have not yet made a firm commitment to deploy the technologies based on a logical framework around something like eliminating energy waste. Without such a framework, companies are selling them on all sorts of angles hoping that one will resonate with decision makers. This is an inefficient method of conducting business. The reason for this confusion is that the GCC overly subsidizes energy, so you can rarely make the argument based on economics at the end consumer level. My recommendation is for companies to attend the exhibitions held in the Middle East, such as the World Future Energy Summit, and really listen to other, more experienced attendees before launching into a sales effort.
Arabic Knowledge at Wharton: Where do you see a common ground between Western entrepreneurs and investors, and those in the developing world, particularly the Middle East? How would financial support and ideas meet?
Shah: For Middle Eastern countries that are "developing," there are certainly many opportunities since much of their energy is derived from diesel and heavy fuel oils. These are expensive and a case could be made to offset these fuels with more cost-effective renewable energy and efficiency technologies. Today, the level of sharing around ideas is high at exhibitions, but financial support is a confusing process because there really are no guiding rules.
Arabic Knowledge at Wharton: Distribution, rather than actual power generation, seems to be the bigger hurdle for some energy development innovations. You mentioned Desertec. Is that the only opportunity in power infrastructure in the region, or do you see other developments?
Shah: The cost of distributing electricity is so expensive in low per capita usage countries. The opportunity is, therefore, in distributed micro-grids, which are not connected with the grid initially, but are self-supporting structures to power small villages. Large projects like Desertec have been in the planning stages at the government-to-government level for over seven years. My sense is that entrepreneurs will see opportunities from that investment in the next few years.
Arabic Knowledge at Wharton: Despite innovation even in its own borders, the U.S. has largely resisted changes to its energy consumption and lifestyle. Are there any emerging global trends that will force energy consumption changes in the West?
Shah: The U.S. electricity industry is predicting overall sales of its products to grow less than half a percent per year. My sense is that this could easily be brought to zero just by wringing efficiencies from the grid. This leads to higher electricity rates, as the investment in new power lines and generating capacity to replace retiring infrastructure will have to be paid for by rate payers. You will see an average of 5% electricity price inflation per year — leading to much greater interest from U.S. consumers in reducing energy consumption.
Arabic Knowledge at Wharton: Many projects in this field are still very early in development. Is this solely a long-term investment game, or are there any opportunities for investors seeking quicker returns?
Shah: This is infrastructure, so the only way to make quick returns is to focus on options and publicly traded stocks or short paybacks on energy efficiency. Otherwise, you are focused on slow and steady returns on 10- to 20-year investments. My feeling is that we are still in a financial malaise because we are overly concerned with short-term profits. The planet needs better infrastructure and this represents the largest wealth creation opportunity on the planet. Investors who read this article need to be part of this movement, or they will get left behind.
Arabic Knowledge at Wharton: Can you give any examples of companies doing interesting work today?
Shah: One company is offering the equivalent of a power purchase agreement for produce. They have copied SunEdison's plan and are growing vegetables on the rooftops of grocery stores, selling the vegetables to the stores. Skyline Innovations [a Washington, D.C.-based solar power utility company] and Equilibrium Resource Management [a Portland, Oregon, firm assisting corporate investments in energy efficiency, on whose board Shah sits] are both innovative companies treating buildings as power plants. More broadly, entrepreneurs today can set up a solar company, for example, as neatly as they can set up a bakery. Thousands of entrepreneurs will jump into solar every month. I just talked to three people today, who are starting their own solar company in Tennessee.
Arabic Knowledge at Wharton: What should entrepreneurs be thinking about at a macro level as they approach this market?
Shah: First, many people don't know that over 50% of new energy capacity added is zero emissions technology — new solar, new hydroelectric. That is headed to 100% in the 2012-to-2013 timeframe. That means no new coal and gasoline infrastructure. It is what the data shows us and it is accelerating. Second, there is more money chasing renewable energy than there are projects. In biofuels and electric cars, there is a shortage of money, but in renewable, plenty of money is available. Third, my big concern is that people in this space are overly enthusiastic about getting everything right the first time. Some projects need a 9% expected return to make the deal work, but the first rate of return in any asset class is more like 18%. The key is to wait until the funders get used to the asset class … and expected returns might come down to 6% or 7%. That was SunEdison's trajectory. Our returns started at 16% and they came down to 6.5% over time.
Arabic Knowledge at Wharton: How should entrepreneurs think about the government's role?
Shah: The government's role is to offer incentives to push people in the right direction when it comes to infrastructure. Eventually, we need to get to true cost accounting, but in the meantime, we need government bodies to offer hard subsidies of US$25 billion to US$30 billion a year. This would make renewable energy competitive with oil and gas, which are heavily subsidized; the oil, gas and coal industries have never left their subsidies behind. This is really about putting newer technologies on a level playing field.
The key for entrepreneurs, though, is to work within an existing technology and regulatory framework to solve a problem. Otherwise, they would be taking too much risk, and it would be impossible for venture capital to fund them.
