The Race to Dominate the Carbon Supply Chain

The stars and planets are lining up for the mother of all marathons—the race to dominate the carbon supply chain and the money that is to be made from connecting the dots of the energy, environmental and economics touch points required to reduce greenhouse gas emissions without going broke in the process.

This is not being driven by do-gooders out to save the planet.  This is pure greed and lust for profits at a time when every part of the economy and every government printing money to save it needs all the profits we can get.

Recessions have a wonderful way on concentrating the mind.  When you smell a competitor’s blood in the water you become just like a great white shark eager for a kill. And indeed there are many struggling firms out their right now right for the taking. That we see the makings of a feeding frenzy in cleantech acquisitions is a very positive sign of recovery on the horizon.

The good news is that achieving the goals of reducing greenhouse gas emissions and improving energy efficiency will only be solved by hungry capital markets willing to put their money where the politicians’ mouth is to get the job done.  That governments around the world are willing, right now, to throw money at the problem in hopes of salvaging their policy goals is speeding up their process but not driving it.

What are the factors driving this process?

1. Consolidation in Enterprise Supply Chain Software

There is a global struggle for market leadership among the major players in the enterprise software segment:  Oracle, SAP, IBM and Microsoft.  Each wants to dominate the supply chain and win the profits from installing their business software solutions across the enterprise.

The climate change issues are persuading the Fortune 1000 corporate players that the only way to inoculate themselves from charges they are not doing enough to reduce emissions it to understand and track their carbon foot print across the supply chain.  By forcing vendors to clean up their act and then take the carbon credit for the emissions savings, these corporate players have more power to produce genuine emissions reductions and energy efficiency gains that all the government policy conferences combined.

The pay-off from market leadership is not just the recurring revenue from software licenses, but the fortune to be made from selling applications and services that add features, functionality and leverage to those solutions. The Oracle (ORCL) purchase of Sun Microsystems (JAVA), with its hardware and software capabilities to make energy-efficient servers, storage systems and data centers was made sweeter when Oracle appeared to snatch Sun from the grasp of IBM in the process.  While not as flashy, SAP’s (SAP) recent acquisition of Clear Standards, a privately held firm that helps businesses track and report greenhouse gas emissions and energy consumption are two recent examples.

Meanwhile, Microsoft Corp. (MSFT) completed a $3.75 billion debt issue in its first time dive into the U.S. corporate bond market raising questions about whether Microsoft was about to make a big acquisition not of Yahoo but according to rumors being spread by a Reuters story reporting on a Barron’s analyst suggesting SAP is more prey than predator.

See what I mean. . .blood in the water.

2. Smart Grid Technology Game Changer

The second factor driving this feeding frenzy is the potential game changing implications of smart metering technology to open up access to the broad energy and utility marketplace to savage the traditional utility business model.  Using technology to harness the power of real time energy use makes possible sales of a vast array of electronic gadgets, solutions and services to help both business and homeowners save energy and reduce their carbon footprint.

Again, this is not being driven by do-gooders, but in the search for profits. There is a herd mentality at work here in Silicon Valley over cleantech as the next wave for growth.  Most knowledgeable players in the energy space understand that the combination of the drive to expand renewable energy use along with with the drive to reduce greenhouse gas emissions is setting up the mother of all rate increases for consumers—and revenue for cleantech firms offering solutions to extract that revenue.

The bet being made is that higher utility rates will provide incentives for consumers and business to optimize efficiency and then shop for the best deals for commodity energy from alternative (read clean) sources and the services to deliver and manage them.  This puts added pressure on state public utility commissions to again offer retail access reducing the monopoly hold of utilities if not for residential customers at least for business class ratepayers.

Once access is open, the flood gates spill profit potential across the landscape by the rapid advance of Home Area Networks (HAN) seeking to leverage home management services to control appliances and energy consumption using data from the smart meter.  But HAN players will also seek to aggregate customers by offering entertainment, information, risk management and other services using the smart meter and the HAN home server as a gateway for our disposable income.

How long will it be before someone like Comcast offers me the “Home Energy Channel” which slurps in the real time smart meter data from PG&E and links it with the sensors installed on all my energy consuming appliances and a Software as a Service (SaaS) application I can use with my TV remote to check my carbon footprint, tweak my energy optimization settings, shop for renewable energy products from multiple vendors for the coming market period, and then set alerts to my I-phone when decisions are needed between alternatives.

See what I mean. . . game changer.

3. Utility Business Model Extreme Makeover

So what will happen to PG&E, my utility provider, and others like it when their traditional ratebase regulatory business model crashes?  There is a process underway right now to slowly tradition to the energy utility business future.  It is called “decoupling” in regulatory speak.

In short, this is the process of changing the regulatory compact—the basis upon which utilities earn a profit—from return on capital invested in building power plants and utility infrastructure to performance based rates—successful results in persuading customers to use energy more efficiently, from more renewable energy sources and use less of it overall to reduce emissions.

I predict that many utilities will embrace distributed generation as their salvation and bridge to the future.  Since they have to purchase more renewable energy anyway to meet state mandated renewable portfolio standards why not just “do it”?  Imagine, instead of building (or buying the output from a merchant) new combined cycle gas power plant in the traditional central generation business model, what if your utility instead offered to install a solar roof on your house sufficient to make you largely self sufficient.  Would you sign up for that deal and be willing to pay the utility essentially what you are paying now as a fee?  The utility would treat your roof like a power plant.  Add thousands of roofs together and you have the equivalent of that big power plant of the past.

Why would the utility do that?

The utility wants to continue to own the customer and the gateway access to that customer.  Wholesale competition has already pushed the utility out of the business of building new power plants.  That is now done by merchant generators largely.  Now the PUCs are telling utilities to reduce emissions and buy renewables.  The only way to achieve those policy goals is to get you to pay more to use less.

The utility is in the best position to be a hero to its customers (or not be blamed for sky rocketing energy bills) by converting its commodity sale of energy business model into a sale of “premium” clean, renewable, designer energy risk products and services.  It can use a distributed generation approach on the unregulated side of its business to create a renewable portfolio that it can sell into the grid and then offer you choices from many suppliers from its gateway services.

You’ll notice that reducing emissions and expanding renewable energy are byproducts of this transformation process underway.  They become useful regulatory pressures to speed up the transformation—but the real deal is profits.

Hey!  There is nothing wrong with doing well while doing good.