Green Alpha's Next Economy

Why Google Will be the Next Economy

Not too long ago we were making a capital pitch to a respected Silicon Valley venture capitalist. He seemed to understand our ideas about the emerging Next Economy, and he agreed that the world had better be headed that way soon to avoid serious risks to civilization. Looking through the 80-some constituents of our Green Alpha Next Economy Index (GANEX), he praised our vision of combining all the necessary elements of the future green economy in one place. He was seemingly in love with our names in solar, wind, batteries, basic research, transportation, water, wave power, green building, etc. But then, looking at one name, he stopped short. “Google?” he asked, “what the hell does search have to do with the green economy?”  He literally laughed out loud. We had two follow-on meetings with this guy (no investment was ultimately forthcoming, incidentally), and each time, he ridiculed our competence to correctly model the next economy on the basis of this one holding.  Now I don’t think that just because you wear the title of VC means you need to know everything, but, in this case, there’s only one word for this guy’s reaction: clueless.

Google, whatever else it may be (a lot), is not just an example of a Next Economy company. It is arguably the example (for now) of the best, most clear sighted, realistic, practical enterprise of smart people who, when confronted with the complicated realities of a populous, warming, resource-constrained world, decided to put up rather than shut up. Why?

First, Google’s core search business, despite what Mr. VC might think, is itself critical to a sustainable future. Fast, relevant searches, combined with Google’s myriad efficiency boosters (think Maps and mobile payments), streamline and render more productive not only obvious things like office productivity, but also enable the increasingly rapid advancement of science, technology and other pursuits that benefit from real-time availability of very precise information. For all I know, Google is attempting to quantify the dollars or percentages this adds to our gross world product, but suffice it to say that the effects are significant.  Forrester calculated that Google Apps alone provide businesses with a 307% return on investment. Smart tech economists will no doubt render better opinions than mine on this, so I’ll move on to a few of the company’s other pursuits.

Renewable energy. It was my turn to laugh when I heard a CNBC anchor say that Google’s investments in zero-carbon, renewable energy were “distracting from core business” and “damaging the firm’s value.” On the contrary, Google’s accurate vision of our growing need for domestic, secure, safe, not poisonous, less-vulnerable-to-natural-disasters energy means that their holdings will be perfectly positioned to provide a commodity that, exactly like search, we never stop needing: electricity.  Google, for all its size and wealth, is actually in the early stages of building a dynamic conglomerate. Consider this selected list of the company’s many green energy investments:

• $55 million into the Alta Wind Energy Center in Kern County, California.  This wind station will generate 1.5 gigawatts, which can meet the demand of some 450,000 homes.
• $168 million into the Ivanpah Solar Electric Generating System (solar thermal), which may be the “largest solar energy project in the world” at a capacity of 392 Mojave sun-powered megawatts, approximately equivalent to the requirements of 140,000 homes.

 

 

Image: rendering of the completed Ivanpah project (source www.brightsourceenergy.com)

• $100 million into the Caithness Shepherds Flat wind farm, “with capacity of up to 909 megawatts (about 325,000 homes’ worth), located immediately south of the Columbia River in north-central Oregon, on approximately 32,000 acres.”
• Undisclosed but no doubt very large investment into undersea transmission cables off the Atlantic coast designed to allow Eastern cities to tap into massive offshore wind potential. Google owns “41.7% of the development phase of the project,” according to the WSJ.  The entire 350-mile project is valued at $5 billion.

So, wind, solar and infrastructure. A good long-view mix if your goal is to be a dominant energy player in 10 or 20 years. All in, I count at least US$455 million invested so far by Google into renewable energies. There could be more I’m not aware of, and there’s certainly more to come. And Google’s Next Economy efforts aren’t limited to energy.

Creative applications. Google is tinkering with ways to ignite and boost the next economy that we hope will soon become commonplace in business and daily experience. For example, they were early to install solar carports and electric vehicle (EV) charging to employees, and as far as I know were the very first to offer inductive charging plates so that all an EV driving employee need do to juice up is park at the Mountain View HQ campus, and walk away.  For EV drivers who don’t work there, Google has added all publicly-usable EV charging stations to Google Maps.  Back at their “core business,” Google is employing creative ways to minimize not only the power but also the fresh water impacts at data centers via new ideas such as using sea water as a coolant. In the realm of finance, Google Payments has every chance of catching on huge and accelerating economies right at the point of sale. And it’s rumored that Google may be endeavoring to improve upon the Bureau of Labor Statistics’ Consumer Price Index with their own Google Price Index. Google’s being tight lipped about the project, but we’re sympathetic to the ideal, since providing a redefined metric to benchmark the economy that matters most is what we’re doing too.

 

Image: Google green transportation initiatives (source: http://www.ideaconnection.com)

Now, in aggregate, we ask the question, who if not Google stands to profit when the imperatives of the next economy become evident? What enterprises will thrive when, for example, coal is in relative terms far too expensive to keep mining and burning? Who will loom large as peak oil becomes increasingly expensive or a hostile OPEC decides simply to turn down the spigot? Who will be positioned to seamlessly conduct business when the policy world finally does come around to limiting greenhouse and toxic emissions? It’ll be entities such as Google and Germany who, despite the almost complete failure of U.S. and international policy to devise programmatic prescriptions for change, have decided to forge ahead.

The way we here at Green Alpha ® Advisors model the Next Economy and thus build our portfolios starts with us asking “which companies are leading the way to the future, green economy?” and “what firms existing now can we imagine thriving in that world?” We believe Google qualifies both ways and will be able to persist in a model of the next economy even 50 years out. Further, as opinion leaders, Google is bringing their brand of non-linear thinking into the mainstream, which in itself is a positive game changer.

If Google is crazy, it’s crazy like a mutant nuclear fox on steroids.  We love their ongoing growth prospects and have been betting on them in our benchmark GANEX since that index’s first day, December 30, 2008. We’re not selling GOOG shares any time soon. Folks who say Google has reached maturity (or has even bubble status) fail utterly to grasp the company’s vision to become a global leader in much more than search and information. More than that, they fail to understand the demanding requirements of the Next Economy.

Garvin Jabusch is the cofounder of Green Alpha Advisors, LLC and manages The Sierra Club Green Alpha Portfolio -- a unique blend of Green Alpha Advisors' Next Economy universe and the Sierra Club's proprietary green-investment guidelines.

Audacious Germany Going Next Economy

At Green Alpha ® Advisors, our whole reason for being is to model the Next Economy and then to build investment portfolios of companies leading the way to that economy, of companies that we can imagine easily inhabiting that future. This Next Economy future is one in which the equations of the earth’s ecology and the global economy have at long last been brought in to balance.  And, strange as it may seem to those of us who see clearly much of what this emerging green economy must entail, we do hear the litany of criticism from the fossil-fuel side: “portfolios without oil, coal, nuclear, gas-burning cars or [insert any legacy technology]? Impossible!”  And yet, as entrenched as this resistance is, here comes audacious Germany with a grand Next Economy vision of its own. Germany's vision, though, is not merely aimed at modeling stock portfolios, but, awesomely, at building an entire, massive, modern, developed nation-state next economy.

This will make Germany the first, best Next Economy laboratory, meaning it will get all the benefits, but will also face many of the unforeseen problems. For us at Green Alpha, that means our conceptual and portfolio models are going to start being real world tested sooner than later, and we’ll be able to more rapidly and accurately refine and update our theoretical models as Germany progresses. 

So, what’s the plan so far?  Germany’s roadmap is laid out in their Teutonically thorough, province-by-province "National Renewable Energy Action Plan." Highlights, as summarized by Chancellor Angela Merkel in her new six-point plan (reported here by Der Speigel) include:

• “Expanding renewable energy. Investing in more wind, solar, and biomass energies will try to raise the renewable-energy share of Germany's total energy use -- from a baseline of 17 percent in 2010.”

Note here that 17% renewables in 2010 already made Germany a world leader, with fully half of the world’s total installed solar capacity. So they’re already well positioned to go after higher targets, even with their approach of skipping right over nuclear (to be totally phased out by 2020-2025) and going right to renewables.

• “Expanding grids and storage. Building a much larger storage and delivery network for electricity -- particularly wind energy, which can be generated in the north but must be carried to the south -- will be a main focus.”

Storage is of course key to resolving the intermittency of solar and wind, and has been a cornerstone of Green Alpha portfolios from the beginning. Upgrading the grid to make sense of where power is coming from, where it’s stored and the best times and places to utilize which; and understanding how to efficiently utilize power from a million distributed rooftops is the other key. We love Germany’s attitude to smart grids as stated by Dr. Norbert Rottgen, German Federal Minister for the Environment: “It is economically nonsensical to pursue two strategies at the same time, for both a centralized and a decentralized energy supply system, since both strategies would involve enormous investment requirements. I am convinced that the investment in renewable energies is the economically more promising project.”

• “Efficiency. The government hopes improve the heating efficiency of German buildings -- and reduce consumption -- by 20 percent over the next decade.”

 
Image: Evaluating a home’s efficiency via infrared photography
(source: http://www.bmu.de/klima_energie/doc/41060.php)

• “"Flexible power." The government wants to build more "flexible" power plants that can pick up slack from wind or solar energy when the weather fails to generate enough electricity during peak demand. The obvious source of "flexible power" for now, besides nuclear energy, is natural gas.”

Here’s a major point of disagreement for us.  While Germany, facing the practicalities of keeping a nation state running, may be required to use natural gas as a bridge fuel on the way to true renewables, we have the luxury of excluding it from our portfolios and focusing instead on the ultimate long-term winners in renewable energy.  Natural gas doesn’t make that list because it unleashes large amounts of CO2 and methane, and its extraction process is proven to contaminate groundwater. These externalities will ultimately make it too expensive to compete with real renewables.

• “Research and development. The government will increase government support for research into better energy storage and more efficient grids to a total of €500 million between now and 2020.”
• “Citizen involvement. The government wants to involve its sometimes-recalcitrant citizenry due to ongoing resistance against wind generators and the installation of an efficient new power line grid in some regions.”

The Next Economy and Policy: Like Oil and Water

Often when I'm speaking or making pitches to prospective investors, someone, not unreasonably, will ask, "what's the primary threat to your business model?" My answer is that the entrenched fossil fuel economy oligarchs may succeed in their attempt to thwart the emerging Next Economy with their relentless campaign of disinformation, state and national political influence, shady dealing and outright villainy.  In other words, the primary threat to the emerging green economy is our busted, ill-informed, cronyist form of capitalism.

First, to understand why I equate a threat to the green economy as a direct threat to the Business of Green Alpha ® Advisors, consider our "this-is-really-what-we-do-not-just-fluff-copy" mission statement:

Green Alpha ® Advisors’ mission is to deliver shareholder value earned in the critical and necessary process of balancing the world economy and Earth’s environment. Driven by the transition to eco-efficiency required to provide economic, energy and environmental security, Green Alpha Advisors is a conduit of capital into companies representing the Next Economy™. Next Economy companies are market leaders responding to the challenges presented by a warming, increasingly populous, carbon-and-resource-constrained world.  Through technology and innovation, carefully selected portfolios of these companies deliver strategic growth through opportunities in transportation, communications, commerce, infrastructure, materials, energy, agriculture and water.

In other words, we only invest in companies placing themselves right in the path of the primary threats facing civilization and in those whose operations will allow them to thrive in a clean, green economy 30 or 50 years hence.  If these guys don't perform well over time, Green Alpha (and, um, civilization) won't perform well.

We've long had the position that "we can't count on policymakers for anything, so business and individuals are going to have to solve the ecology-economy equation for ourselves." Of course there are myriad examples to cite in cementing that point, but the best summation I've seen recently is in David Roberts' recent piece Policy in an Age of Post-Truth Politics in Grist: "Republicans thus talk about 'taxes' and 'spending' and 'regulation' in the abstract, since Americans oppose them in the abstract even as they support their specific manifestations. They talk about cutting the deficit even as they slash taxes on the rich and launch unfunded wars. They talk about free markets even as they subsidize fossil fuels. They talk about American exceptionalism even as they protect fossil-fuel incumbents and fight research and infrastructure investments. In short, Republicans have mastered post-truth politics. They've realized that their rhetoric doesn't have to bear any connection to their policy agenda."

For a concrete example of how this may be thwarting the green economy, look no further than the list of highly specific budget cuts directed at the Energy Information Agency (EIA), as disclosed in their April 28, 2011 press release.  It reads like a wish list of fossil fuel executives. Items such as "Eliminate annual published inventory of Emissions of Greenhouse Gases in the U.S.," "Terminate annual data collection and report on solar thermal," and "Do not prepare or publish the 2011 edition of the annual data on U.S. proved oil & natural gas reserves" are highlights, but you have read it to believe it. If you still doubt these are intended to bury information that may undermine fossil fuel interests, I'll share one more, "Suspend auditing of data submitted by major oil and natural gas companies and reporting on their 2010 financial performance through EIA's Financial Reporting System." So now, in the name of "deficit reduction," we can't even audit big oil’s self-reported financials. Call me a cynic, but something tells me that a full audit might result in the adding of a lot more revenue to the Treasury than suspending it will save. 

So, how is it that information can not only be easily buried but never even collected if that serves the interest of the fossil fuel oligarchy?  Because, as Roberts says, "the crucial fact of post-truth politics is that there are no more referees. There are only players."

So, again we repeat, don’t count on policy. Invest rather in the best ideas, approaches, technologies and individuals that have placed themselves in front of the worst environmental and security threats to our civilization. True capitalism, wherein money follows the best, most efficient ideas, will in the end prevail in spite of crony capitalism's best efforts, because ultimately that's what's in everyone's best economic interests.  For example, solar electricity generation gets cheaper and more efficient every year. Before long, it will become much cheaper than coal, and coal will fade away as a fuel for powering the grid. Not because of anyone's ideological point of view, but because it will make obvious economic sense. The coal industry is trying to slow this transition, but in the end a cheaper deal is a cheaper deal. Fortunately, cleantech is by definition extremely efficient and when brought to scale it will in general, application for application, be more competitive than its legacy economy counterparts.

 So, what's the current temperature of the people on all of this? By and large, the answer to that is in proportion to what they believe, right or wrong. The cynic in me is worried that in the post-truth age, we'll all fall prey to the outcome of the warning given by James Madison, "A Popular Government without popular information or the means of acquiring it is but a prologue to Farce or Tragedy or perhaps both.”"And yet the Pollyanna in me is buoyed by the words of the great emancipator Lincoln who said, "I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis." In the age of the Internet, people do have "the means of acquiring" access to the truth, and it is just possible that awareness of the world as it is, delivered in the content of the work of folks like David Roberts, Joe Romm, Lester Brown and so many more, can someday soon become conventional wisdom (or at least common knowledge), which, in turn, can affect decisions in the voting booth, at the supermarket, in the car dealership and at the utility grid.

Garvin Jabusch is the cofounder of Green Alpha Advisors, LLC and manages The Sierra Club Green Alpha Portfolio -- a unique blend of Green Alpha Advisors' Next Economy universe and the Sierra Club's proprietary green-investment guidelines.