http://www.businessweek.com/innovation/the-cleantech-threshold-09082011.html

Innovation and Engineering in America

The Cleantech Threshold


Sometimes change seems to happen in slow motion. A new technology or business model can be an ongoing topic of discussion, with little change in the market. The merits of e-book readers, for instance, were discussed over a period of 15 years. But when a compelling product—the $139 Kindle—hit the market at an attractive price, consumers pounced. Industry players that adapted early to the shift are the ones that survived (Barnes & Noble (BKS:US)) and thrived (Amazon (AMZN:US)), while others (Borders (BGPIQ:US)) ended up leveled because they failed to develop a strategy for the change.

I believe we’re nearing a crossover point in a key area of cleantech—electric cars. Over the coming months, two leading e-car models, the Nissan (NSANY) Leaf and the Chevy (GM) Volt, will expand beyond limited test markets. The global launches will be supported by new business models for creating a charging infrastructure.

Calculating the “Total Cost”

To see how e-cars have started to cross key price-performance thresholds, we have to do some math. Using Kiplinger.com’s Green Car Calculator, my team at Innosight selected five car models to figure out how much they’d cost over five years of ownership (see chart). We compared the all-electric Nissan Leaf and the plug-in Chevy Volt, which is powered by a rechargeable battery but includes an extended-range gas engine. We put those two e-cars up against the Toyota (TM) Prius and a Lexus hybrid as well as a popular gasoline model, the Ford (F) Fusion.

The resulting chart shows that at $4 per gallon of gas, the Leaf is cheaper to own than a Toyota Prius, even though the dealer invoice cost of a Leaf is $10,000 higher.

And with gas at $4, the Volt is not only less expensive to own than a Lexus but it also narrowly beats a Ford Fusion. How can a $39,000 Volt be cheaper to own than a $21,000 Fusion that gets 33 mpg on the highway? Factor in the federal tax credit for e-cars along with five years of gas bills (compared to five years of electric bills) and you have your answer.

If prices at the pump continue to climb, e-cars become even more attractive. With gas at $5 per gallon, the Chevy Volt becomes cheaper to own than a Toyota Camry, a Honda Accord, or a Volkswagen Jetta.

These kinds of price changes can lead to a threshold for new consumer behavior. How many people do you know who never considered e-books an attractive option two years ago but are reading them now? In a similar way, we’ve been conditioned to believe that cleantech solutions are unattractive because of the cost. Many businesses and consumers are not aware of the fact that we’re close to cost parity in the e-car space in the U.S. (Of course, if you go to Canada or Europe where gas is already $5 to $10 per gallon, this point becomes more obvious.)

Revving Up New Business Models

Certainly, e-cars and e-books are different situations in many respects. But both are enabled by new technology and new business models. Book publishers that have embraced e-books have figured out how to create, price, and market their products in new ways.

Something similar is starting to happen with e-cars, where a new ecosystem is developing in anticipation of a new market. Some electric utilities, such as NRG (NRG), are offering to install free 240-volt charging stations in consumer garages if they sign up for three-year plans—such as $89 per month for unlimited off-peak car charging. Cities such as San Francisco are installing free charging stations around town. And retailers such as Best Buy (BBY) and Walgreens (WAG) are installing charging stations in their parking lots, to entice drivers to shop while refueling.

Crossing Wind and Solar Thresholds

All this activity raises the question: Are electric cars really cleaner than gas cars? While they don’t produce any tailpipe emissions of carbon, they are indeed fueled by electricity plants that burn fossil fuels like coal, which is the dirtiest source of power.

This is where the cleantech threshold gets even more interesting. That’s because the electric grid is steadily getting cleaner. Several new coal plants have been canceled because of environmental concerns. Typically that capacity is replaced by natural gas, which produces roughly half the carbon emissions. Wind power is also growing fast, with U.S. capacity increasing tenfold over the past decade, according to the U.S. Energy Dept. The state of Texas already gets 10 percent of its power from wind, and that surges to nearly 20 percent on peak wind days. Wind has already reached cost parity with natural gas in many locations.

More thresholds are being crossed in other areas of cleantech. Due in part to cheap mass production in China, the cost of solar panels has dropped about 75 percent over the past decade, and the Energy Dept. forecasts that solar costs will drop another 75 percent by the end of this decade, bringing it in line with the cost of coal power.

Yet it’s anyone’s guess how fast consumers will warm to electric cars. Since electric cars are just now becoming widely available, the predictions are all over the map. Market research firms estimate e-cars will capture anywhere from 2 percent to 15 percent of the total car market within 10 years, depending largely on the price of oil.

But here’s where the e-book analogy comes back in. If you look at predictions of e-book adoption as recently as 2009, all the estimates were wildly low. Only when Amazon announced earlier this year that it was selling more e-books than print books for the first time did everyone realize the transformation was here. By then it was too late for some of those who missed the ride.

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Mark W. Johnson is co-founder of the innovation strategy consulting firm Innosight. He is the author of Seizing the White Space: Business Model Innovation for Growth and Renewal.

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