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Racing to Energy's Great Green Future

Back in 2000, when Frederick Schilling concocted Dagoba Organic Chocolate in Central Point, Ore., he faced a choice: He could buy the cheapest possible electricity to make his organic chocolate bars containing hazelnuts, pecans, and berries, or he could pay 20% extra to have the local utility pump him energy derived from renewable sources, such as sun and wind.

Most small-business owners count every penny, making this a no-brainer: Go with the cheapie. But Schilling, a long-time environmentalist who wraps his bars in recycled paper, went with his principles. That turned out to be a major ingredient in his sweet (or bitter, if you like dark chocolate) success.

Last year, unit sales of his 16 different kinds of chocolate bars, sold nationwide in stores like Whole Foods (WFMI), jumped nearly 400%. Schilling attributes some of that success to his belief that "our customer base appreciates that we're using alternative energy. It works as a marketing point."

ANTI-STATUS SYMBOL. Not too long ago, it would have seemed absurd to suggest that people would pay more for products produced with alternative energy. That this notion no longer seems so odd reflects how the quickly maturing world of alternative energy has moved from the fringe to the mainstream. Nearly everyone is an environmentalist now -- it's just a question of what kind. National public opinion polls show that 75% of U.S. residents support increased use of renewable energy.

The public, long infatuated with gas-guzzling SUVs, has a growing crush on alternative cars. Thanks to rising concerns about greenhouse gases and global warming -- and not incidentally, fuel economy -- Toyota's (TM) new hybrid gas-electric Prius has become a Hollywood anti-status symbol, driven by stars like Tom Hanks and Leonardo DeCaprio.

Ford (F) is convinced it can sell 20,000 of its new hybrid Escape SUV annually. And this fall, General Motors (GM) will start selling its the first hybrid pickup. As an extra incentive to buy hybrid vehicles, environmentally minded consumers get tax credits -- $1,500 from the federal government, plus as much as $5,000 from certain states. Registrations of hybrid vehicles were up 25.8% in 2003, to 43,435, according to automotive consultancy R.L. Polk & Co.

"THE TIPPING POINT." Well beyond leaner, cleaner cars, renewable energy is one of the world's great growth businesses. Power from sources such as the sun, wind, and fuel cells has grown from a $9.5 billion global industry in 2002 to $12.9 billion in 2003, according to research consultancy Clean Edge. The firm expects the market to reach $92 billion worldwide by 2013. "These are no longer alternative technologies," says Ron Pernick, co-founder of Clean Edge. "We are at the tipping point."

That huge business opportunity is making venture capitalists see green. In the first half of 2004, $76 million in VC investments were pumped into alternative energy, nearly double the amount in all of 2003, according to PricewaterhouseCoopers' MoneyTree Survey. Venture-capital firm Draper Fisher Jurvetson has poured more than $20 million into alternative energy startups since 2002. "We are seeing the same ramp-up as we've seen with the Web," says Draper Managing Director Raj Atluri.

Multinational corporations, from carmakers to oil companies, are tripping over each other in the race to the great, green future. British Petroleum (BP) has practically rebranded itself as an alternative energy company. BP's new logo, a cheery-looking sun surrounded by green rays, is plastered across streets and highways around the world, and it's not just clever PR. Oil and gas heavyweight Shell (SC) expects renewable sources -- including solar, wind, hydrogen and biofuels -- to account for a quarter to a third of world energy by 2050.

EVER MORE IMPORTANT. Investments in alternative energy are turning out to be a great business. General Electric (GE) acquired Enron's wind-power business in 2002. And it entered the solar energy business in April, 2004, by purchasing AstroPower, the nation's largest solar-equipment supplier. Both companies have been growing at a double-digit annual rate, while GE's total sales rose only 1% last year.

Shell says its investments in alternative energy could hit $1 billion by 2005. "We see that those technologies are on a very fast trajectory," says Robert Kleiburg, vice-president for strategy and planning for renewable sources of energy and hydrogen at Shell in the Hague, Netherlands. "They'll soon be an order of magnitude or more important than they are today."

Such forecasts have been made since the first Earth Day celebration in 1970, and they've never quite panned out. More people than ever are driving SUVs, the least energy-efficient passenger vehicle on the roads today. And an earth-toned wardrobe did little to help Al Gore's Presidential campaign in 2000. And yet, there's reason to believe that alternative energy really is taking off this time.

HICCUP TO DISASTER. Thanks to a combination of high energy prices and geopolitical risks, alternative energy has moved toward the top of the national agenda. Oil has hit a record $51 a barrel, up from $30 a year ago. Pushing crude ever higher are factors ranging from war, terror, and sabotage in the Middle East, to instability in oil-producing Russia and Nigeria, to rocketing demand in China.

Existing wells are working at 98% of capacity, says Jim Williams, an economist at energy consultancy WTRG Economics in London, Ark. A tiny production hiccup in an oil-exporting nation now has the potential to push the U.S. into a recession.

But the shift away from oil is driven by forces that run even deeper than the pressing geopolitical issues of the day. Simply put, oil and gas are natural resources that will be depleted -- sooner rather than later. While estimates vary, Shell figures that oil and gas could start becoming scarce as early as 2025. That's not so far off.

BETTER AND CHEAPER. Already, energy customers appear more willing to give alternatives a chance. Lots of small businesses like Dagoba's are ponying up more for clean energy. Delivery service United Parcel Service (UPS) is testing several hybrid cars, which run partly on electricity and are up to 50% more efficient that its current vehicles. "By using less fuel, we'd still be able to operate if something were to happen to the oil supply," says Robert Hall, fleet environmental manager with UPS in Atlanta.

As the oil industry faces a inevitably dwindling future, alternative energy is getting better and cheaper all the time.

Take solar energy, which is now hotter than a glass panel on a south-facing roof. "We've never experienced the demand we're experiencing today," says Ron Kenedi, general manager of Sharp Electronics' (SHCAY) solar-systems division. "This is unprecedented." As sales rise at 30% to 40% a year, Sharp plans to expand its Memphis fabricating plant to produce 40 megawatts to 60 Mw worth of solar panels a year. That will boost the capacity of the U.S. solar market, which is now only 90 Mw per year

STARTUP KNOWHOW. In the past, builders have hesitated to install solar panels onto residential roofs because they clash with aesthetic considerations mandated by many municipalities. But in six months, Sharp will release solar tiles that fit the exact dimensions of a roof, making them less conspicuous. (Today, a solar roof would often exceed a traditional roof's dimensions.)

The cost is going down as well: GE Solar is aiming, by the end of the decade, to get solar panels down from today's $6 to $8 per watt installed to $3 by improving materials and system designs, says Ali Iz, who heads GE Energy's solar business.

Startups, which have been tech innovators for generations, are also applying their knowhow to the energy field. Konarka Technologies plans to make solar panels that will cost less than $1 per watt. It has raised its third round of funding. Konarka's $18 million offering was oversubscribed. "[Energy security] isn't a problem that's going to go away in 30 days," says Konarka CEO Howard Berke.

JOB GENERATOR? Proponents argue that green energy could have a huge positive effect on the economy. Democratic Presidential nominee Senator John Kerry says he wants to ensure that 20% of U.S. energy comes from alternative sources by 2020, up from a current federal standard of zero. That could create more than 355,000 additional jobs by 2020, net of any losses in the coal industry, estimates Jeff Deyette, energy analyst at the Union of Concerned Scientists in Boston.

That goal may look steep, but some states are already working toward it. Governer Arnold Schwarzenegger, for one, hopes to get California to the 20% mark by 2010. Maine already derives more than 30% of its energy from alternative sources. Hawaii aims to reach 20% by 2020, and Rhode Island is shooting for 16% by 2019.

The federal government is already investing in the development of fuel-cell technology, which can be used to power gasoline-free automobiles. If those investments continue at the current pace, America's oil consumption could drop by 11 million barrels a day by 2040, estimates Steve Chalk, director of the Office of Hydrogen, Fuel Cells & Infrastructure Technologies at the Energy Dept. That would reduce the country's dependence on oil imports, he says.

To move beyond the petroleum-powered economy will take many years, if not decades. But as oil supplies wane and alternative technologies improves, a new era in energy is powering up. By Olga Kharif in Portland, Ore., and Steve Rosenbush in New York

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