Boston, Mass. -- Boston-based Zipcar (ZIP) raised $174 million from its Initial Public Offering in April 2011. It already operates in 14 big cities and 230 college campuses around the United States, Canada and the UK, and is planning to use this new capital for market expansion. Zipcar is not a high tech business, and its success is not due to sophisticated technological innovation; rather, it's an example of business model innovation.
Zipcar reinvented the traditional car rental business by simplifying and reducing the costs for short-term rentals and rebranding the service as green car sharing. They developed a distributed model of rental locations, an annual membership system, an all inclusive by-the-hour pricing structure, and online booking. Together these greatly reduce the cost and time needed to rent a car, while maximizing convenience. Indeed, most of the people I know who use Zipcar's service are not ardent environmentalists, but enjoy the hassle-free approach and the easy parking.
While public policy and the media tend to focus on technological innovation as the key to addressing climate change and boosting clean energy, business model innovation (BMI) offers a path to rapid deployment of existing technologies. The concept was popularized and given its current acronym by Mark Johnson, Clayton Christensen, and Henning Kagermann in their Dec. 2008 Harvard Business Review article “Reinventing Your Business Model.” They point out that, “low-cost U.S. airlines grew from a blip on the radar screen to 55% of the market value of all carriers. Eleven of the 27 companies born in the last quarter century that grew their way into the Fortune 500 in the past 10 years did so through business model innovation.”
The potential for BMI in the development of the cleantech sector is only just beginning to be appreciated. Rob Day, a partner with Black Coral Capital in Boston, recently wrote about a new wave of startups that run lean and require less capital to scale up. This means that they are less likely to founder in the infamous Valley of Death: “Some of this next wave of startups will be hardware, but many will be software and/or services… Business model innovation will often be stressed over technological innovation. They will sometimes marry energy-related market opportunities with Web2.0 and social media business models and platforms.”
A closer look reveals that BMI holds particular promise for unlocking the potential of clean energy and promoting economic competitiveness, investment and employment in high-cost regions. In addition to helping keep start-ups lean and capital efficient, BMI can develop systemic solutions that overcome some of the many market failures and institutional barriers to energy efficiency and clean energy. McKinsey’s famous Marginal Abatement Curve heralds the good news that about one-third of needed emissions reductions appear to have positive ROI with current technologies. The bad news is that about one-third of needed emissions reductions appear to have positive ROI – yet the necessary investments are not happening, due to these many hurdles. As with Zipcar, BMI provides ways to monetize the ancillary benefits of cutting emissions, and create business models that focus on features that people are willing to pay for.
BMI-based cleantech businesses are also more likely to keep jobs in high wage regions such as the US Northeast and California. Clean energy manufacturing jobs have been moving astonishingly quickly to China, even while there is still rapid technological evolution. Evergreen Solar (ESLR) and A123 Systems (AONE), both based here in Massachusetts, are perfect examples. Business model innovation often focuses on software and services, developing strong relationships with customers and building on existing capabilities in the region, so jobs are more likely to stay local. These factors also help to create barriers to entry, which protects the business model. Zipcar’s network of parking spots, for example, negotiated over several years with hundreds of companies and local authorities, would not be easy to replicate.
Better Place is a powerful example of how BMI can overcome systemic barriers to technology deployment. The company is developing a national replaceable battery infrastructure for pure electric vehicles in Israel, Denmark and elsewhere that transforms the business model for car ownership and fuel supply. Consumers buy a car without the expensive batteries, then contract with Better Place for battery replacement as a service, which is done in just a few minutes at a network of service stations. This model overcomes the physical limitations of batteries, in terms of range and charging time, and dramatically reduces the cost of new cars for consumers. As with Zipcar, governments are willing to subsidize the operation because it contributes toward reducing congestion and greenhouse gas emissions – again, monetizing ancillary benefits.
Energy efficiency and smart grid provide many opportunities for BMI. EnerNOC’s (ENOC) core business model, for example, is demand response and energy management, using sophisticated software and remote monitoring and control. Enernoc links the utilities, who are willing to pay for energy efficiency and for peak-period demand reduction, to a network of customers. Energy service companies like Ameresco (AMRC) are increasingly offering turnkey projects and performance contracts that reduce risks, capital requirements, and uncertainty for customers. Similarly, companies like Nexamp, Tioga Energy and Borrego offer renewable power purchase agreements based on DBOOM services – a complete package where the company designs, builds, owns, operates and manages the renewable energy installation, while the customer only pays for power.
Not surprisingly, then, these BMI-based companies are among the fastest growing businesses in the cleantech sector. Kevin Doyle, a Principal of Green Economy and Co-Chair of the New England Clean Energy Council’s Workforce Development Group, has pointed to the large number employment opportunities at a range of cleantech companies, a number of which are in energy services and software. As a result, they are not just looking for engineers, but also for a range of business and professional skills and expertise – which highlights the purpose of our new clean energy programs at the University of Massachusetts, Boston.
One of the biggest and most profitable power players in the alt energy sector is Tempe, Arizona’s First Solar (FSLR). Trading at nearly $140 before the quake struck, First Solar’s stock has since surged more than 8%, having once spiked by 12%. Transcending the technology of pricier and less efficient conventional solar panels, First Solar converts sunlight into energy with photovoltaic (PV) modules. Ninety percent of the company’s business had been attributed to overseas sales from solar project developers and system integrators in France, Germany, Italy, and Spain. Perhaps this most recent success suggests the sun-kissed company’s future will brighten in its home country.
Shares in China’s Trina Solar (TSL), another residential and commercial solar panel producer, have jumped a whopping 13.62% since the March 11 disaster. A vast majority of the company’s sales are also derived from European countries with its largest customer being Belgium’s green project developer Invictus NV. Currently trading at around $27, analyst consensus is that Trina Solar stock is a buy.
In the days following the quake in neighboring Japan, the sun has also shone on Jiangsu-based Suntech Power (STP). One of the world’s largest solar cell producers and the leader in China, the company’s products are built for both off-grid and on-grid electricity generation in residential, commercial, industrial and public utility applications. With gains currently exceeding 10%, analysts are advising investors to hold at its nearly $9 per share price.
It’s always sunny in San Jose these days, the headquarters of SunPower (SPWRA), the former Cypress Semiconductor subsidiary. In 2009, the technologically advanced solar cell and panel producer (using electricity per panel as a gauge) experienced 6.2% sales growth with over $33 in net income. Currently trading at around $16 per share, Sun Power’s 52-week high reached $20.17 in the week following the earthquake. “Technical indicators for the stock are bullish,” according to Market Intelligence Center.
Currently listed by analysts as a strong buy with recorded revenue of 34.8 billion euros in 2010, is the Paris-based self-described “world leader in environmental services,” Veolia Environment ADR (VE). Its energy unit, which operates global co-generation facilities and heating and cooling systems and services in urban and emerging markets, has seen increased revenue to the tune of 8%. Based on a 6% growth rate and a 10% expansion of operating margins, shares are worth $38 apiece on a discounted basis. Veolia’s transport arm is also a leading bus, light rail and rail provider and serves roughly 30 countries.
Although not a traditional alternative energy company, General Electric (GE) is now helping pave the way to a cleaner tomorrow. Compensating for a dodgier energy past, which supplied nuclear reactors to the Fukushima Daiichi plant, GE is offering a more diverse portfolio of power generation products. The company has eschewed its dirty coal technology for a coal-to-power system called the Integrated Gasification Combined Cycle. It's also a world leader in wind turbine production and boasts its Ecomagination venture, which promotes clean technology. Trading at nearly $20 per share and approaching its 52-week high of 21.65, stock is currently listed as a buy.
One of the top holdings in the green energy ETF Market Vectors Global Alternative Energy (GEX) is Durham, North Carolina’s Cree Inc. (CREE). A maker of energy-efficient LED bulbs and fixtures, Cree also provides semiconductor solutions for wireless and power applications. Last year’s shares peaked at 83.38 when sales grew 52.9% and net income exceeded $152 million. Currently, stock is trading at just under $50 and analysts’ consensus is that Cree is a buy.
The little train car company that could, Trinity Industries (TRN) is leading the rail traffic revolution -- manufacturing auto carriers, box cars, gondola cars, hopper cars, intermodal cars and tank cars. Last week, the Dallas-based company entered into a partnership with GATX (GMT) to build 12,500 new railcars over a five-year period.
Its energy subsidiary, Trinity Structural Towers, is one of North America’s largest producers of structural wind turbine towers in the sector. Earlier this month, Trinity Industries declared a quarterly dividend of 8 cents per share on its $1.00 par value common stock. Currently trading at around $33 per share, analyst consensus is that Trinity Industries is a buy.
When considering diversifying into energy exchange-traded funds, rather than individual stocks, PowerShares WilderHill (PBW) has been at the top of the investment heap -- at least for short term holders. Based on the WilderHill Clean Energy Index, this green ETF focuses on small cap firms with a growth investment strategy and is being favored for value and liquidity. The fund has felt aftershocks to the effect of 1% at over $10.00 against a 52-week range of $4.00 to $11.42.
Another renewable energy ETF currently being touted as a “green stock pick for a post-Fukushima World” is Guggenheim Solar (TAN), which tracks the MAC Global Solar Energy Index (SUNIDX). Including holdings like First Solar and Trina Solar, the fund has roughly $168 million in assets. Following the earthquake, it posted gains upwards of 11% while the S&P 500 fell 3%.
Only time will tell if this uptick in renewables is merely a hypersensitivity to current events or if it will usher in lasting change to our energy landscape. Either way, it may be worth your while to start cleaning up your stock portfolio.