The Impact of the 6th Technology Revolution
Not just an economic opportunity, but an evolutionary imperative.
The Green Economy is addressing unintended consequences of the internet and IT revolution. Infrastructure development has long time lines that are stabilizing an economy that has become reliant on new features, cheap labor, and returns on investments calculated by months or days.
The green economy could not succeed without the inventions of IT. Over time, this magazine has seen an evolution toward an economy developing products and services that are managing critical needs for secure water, food and energy, while designing efficient buildings and transportation. Pioneered by large corporations seeking to reduce risk, save money and develop new revenue streams, organizations of all sizes are now finding opportunities for savings and profits in the green economy.
The Six Technology Revolutions
Carlotta Perez, PhD describes six revolutions in her seminal works on technological revolutions and financial capital. Her paradigm sheds light on how technology evolves and how it impacts the economy and society. This is important for understanding our current, the 6th Technology Revolution, clean and bio technologies. One of the insights from her work is that technology revolutions tend to have the most impact as the next is beginning. In the 1970’s, many of us thought of cars as the dominant industry, rather than the start of the Information and Telecom revolution. Currently, too few realize that we are in the beginning of a technology revolution that may well dwarf those that came before. The second insight is that every technology revolution brings with it fundamental infrastructure changes that can radically reshape economies, as they are doing now. An historical analysis of Ms. Perez revolutions shows how each revolution has impacted--and been impacted by--the times in which they are born. [For a graphic description of the 6th revolutions after Ms. Perez, please see the magazine]
1st: Industrial 1771
As early as the 1700ds, the North needed raw materials for products made possible through the improved development of water wheels, while the new country benefited from the invention of steam boats as a more efficient way to move cotton and tobacco from the South to the North. A national post enabled the drafting of the Declaration of Independence and the Constitution, despite the Founding Fathers being separated by days or weeks. The vulnerable new nation needed an infrastructure to arm, clothe and feed the Revolutionary Army. This lead to canals and waterways, and turnpike roads. As the need for larger solutions grew, the government became a partner in projects such as the Erie Canal, which was funded by 6% government bonds.
2nd: Steam & Railways 1829
The next revolution produced a rail system and steam locomotive engines, expanding American industry and commerce, while satisfying growing consumer demand throughout the North American continent. Railroads dramatically increased social mobility. Trains also played a large part in the Civil War, allowing both sides to transport goods and troops.
3rd: Steel, Electricity & Heavy Engineering 1875
The third revolution followed on the heels of the civil war. Populations became more mobile. In particular, former slaves began moving into the industrial North that was benefitting from cheap steel and electrical equipment. The national telephone system, large bridge and tunnel projects, and the expansion of railroads and canals dramatically increased the speed of product development and delivery. Packaged foods appeared in response to a shift in the population off of farms and into growing urban centers.
4th: Oil, Automobiles & Mass Production 1908
The fourth restructuring started in 1908 with the first commercial airplane: Wilbur Wright took an employee for a ride. Combined with new highways and an improved railroad, Americans became more mobile than ever before. Mass production changed the view of many about their role in society, providing access to goods that had heretofore been available only to a few. During World War II, the United States government spent $321 billion through deficit spending, increased taxes, and war bonds to build the huge industries that out-produced the Axis powers by orders of magnitude. After the peace, the new American middle class—along with devastated European cities supported by the Marshall Plan—had a huge demand for goods. Meeting that demand efficiently, required and helped fund the analog phone system, highways, airports and universal electricity.
5th: Information & Telecom 1971
Computers have been around for a very long time. A Jacquard loom is an early version of an engine built on ones and zeros: on and off. While many people could imagine ‘horseless carriages’ or even electricity—a better version of gas lamps—few could imagine a computer or the impact it would have on our lives. The 5th technology revolution changed how business is done. One of the more dramatic effects to our economy has been the emergence of a commodity market. This has been fueled by the doubling of the capacity of integrated circuits every 12-18 months—predicted by Moore’s Law—which has lead to dramatic reductions in the price of computers and phones. In addition, the ability to ‘surf’ for products by price a has lead to a frantic search for the cheapest goods—with product lifetimes in months—regardless of the impact on communities where factories are located.
The second impact has been that IT and Telecom tends to be funded with substantially less money than previous innovations. IT companies grow much faster—years not decades—than technologies building railroads, a national telephone system or automobiles. Venture Capital invested in internet companies with tens of millions or less, with hoped for returns in the billions from as little as 10% of an investment portfolio. That return, as well, is expected in under 5 years, not decades.
The Sixth: Clean and Bio Technology 2003
The 6th revolution, the one fueling the green economy, has significant differences from the last one.
- Cash Flow: Investment is driven by cash flow generating yields over years—or even decades—from the efficient use of energy, water and other resources. Verifying such yields is at the heart of such investments.
- New Collaborations: Investments that move technologies from ideas to products develop through collaborations between universities, corporations, government, banks and private equity, technology incubators, policy makers and even competitors. Green economy entrepreneurs are not a lone wolves in their dorm rooms.
- Localization: Corporations and individuals are taking back control of what has been the domain of utilities by installing mini-grids, purchasing energy through auctions, storing and cleaning water, and managing use through sophisticated data systems. Such actions are reshaping the way utilities do business, and encouraging companies to understand, analyze and control how they use critical resources.
- Decentralization: Corporate innovation is increasingly happening locally throughout the world. Foreign divisions support local universities and research labs, and partner with local distributors and manufacturers. They vary in the amount of autonomy, some becoming virtual satellite entities reporting to the corporate parent. Locating close to markets reduces transportation costs, ensures that the design and manufacture of products fit the local need, and smooths regulatory, market and other barriers. Such localization extends to the US, encouraging ‘on-shoring’ by both US and foreign companies.
While wars have influenced many of the technology revolutions of the past, the current one is driven by changes in weather patterns, resulting from an ongoing failure to address the consequences—externalities—of our overuse of resources. There may be a few remaining scientists who think either that climate change doesn’t exist or that humans cannot affect it. However, as people experience the impact of disasters on their families, friends and businesses, they have become much less skeptical. This rise in awareness has lead to a feeling of helplessness or even anger at the United States’ slow response to protecting citizenry from current realities.
Who Stands to Benefit
The economy is a word that is used all the time, yet it means very different things to different people. As millions of dollars have become billions, and billions turned into trillions, these staggering sums overwhelm, leaving many resigned to business-as-usual. However, the green economy is changing some of the underlying structural challenges through: Long term reliable financing; re-energized manufacturing; and new services to manage security and efficiency.
Volatility appears to be increasing, ironically mirroring the challenges in our weather. The Great Recession of 2008 was a bubble based on real estate speculation. As wages stagnated, many started using their homes as a way to hedge against an uncertain future. A look at the current financial output shows that real estate continues to dominate. [See chart at right] Real estate continuing to outrun the rest of the economy at such a pace can’t be sustainable. The people who pay for that real estate are working in industries that are not moving at a pace with their housing costs. Infrastructure investments, based on technological innovation and the output of installed projects, provide an underlying stability for an overheated economy. Such projects have a different risk profile than cell phones or computers with an average life of 1-3 years. Investments require sophisticated financing that is data based and grounded in technological expertise. There are two forms of financing essential to the green economy: product and project finance.
Innovation in clean and biotechnology is starting at universities with labs, equipment and experts funded by government or foundation grants, not in dorm rooms. As Michael Holman, PhD at Lux Research has pointed out, the size of the first investment to move a product from idea to commercialization is apt to in the tens or hundreds of millions of dollars. As a result, the next step is often a collaboration with a corporation with an interest in the technology. As Volans reported in Investing in Breakthrough: Corporate Venture Capital, Corporates are investing at many stages. This dynamic is bringing unlikely partners together, adapting technologies so that they can be manufactured at an attractive price, in large enough quantities and in a timely manner for a ready market. As the National Venture Capital Association noted, 160 corporate venture groups invested almost $3.3 billion through the third quarter of 2014, representing 9.3% of total venture dollars invested and 17.7% of all venture deals.
Financing for projects to put new technologies into the field is dependent on cash flows generated by the project over years or decades. Projects vary from thousands of dollars (residential solar, insulation, upgraded windows, efficiency and wind) to millions (high speed rail, wind farms, waste to energy, and utility scale renewables). From a shaky start in 2008, when investors with little understanding of new technologies rushed in and got badly burned, the market has matured. Now dominated by experience and expertise, companies with track records have finance, market, technology and management expertise. As important, they have projects that are demonstrating that they are investor worthy.
One stumbling block has been transaction documents that cover all the ‘what-ifs’ in complex projects with long time lines. Such concerns can include who owns the project, what happens when the owner sells, who will maintain the project, how it will be upgraded, specifications for technologies, what entity will purchase the output of the project and for how long, and what happens if costs dramatically change. While there are many ‘flavors’, two approaches include:
- Successful project developers who are bundling their own projects, creating securities and bonds that they sell to qualified investors.
- Securitization, such as that evolving from the work of NREL, the National Renewable Energy Lab. These securities are investment grade and large enough to be attractive to institutional buyers.
These transactions are creating paradigms used for investing opportunities for water quality and quantity conservation, agriculture and aquaculture, energy and water efficiency and much more. As infrastructure improvements become investor worthy, they provide a stable basis for individual and institution portfolios, offsetting riskier investments while driving technological innovation.
In any economy, manufacturing is critical, providing goods that people need or want, ideally in greater proportion to those imported. One measure of manufacturing is GO, Gross Output which is the total sales volume at all stages of production. As Mark Skousen in Forbes Magazine said: “GO is a measure of the ‘make’ economy, while GDP represents the ‘use’ economy. ... [F]ocusing only on final output, GDP underestimates the money spent and economic activity generated at earlier stages in the production process. It’s as though the manufacturers and shippers and designers aren’t fully acknowledged in their contribution to overall growth or decline.” In the United States, manufacturing is second only to finance, which includes insurance, real estate, rental and leasing.
One way that the green economy is helping the US is increasing manufacturing, which provides multiple benefits across the economy. Manufacturing directly employs people at many levels with a variety of skills, as well as a supply chain of vendors. One dollar spent on manufacturing in the US has a high ‘velocity’ because workers spend a large percentage of their income, so more dollars pass through more hands. However, looking at the breakdown of manufacturing from 1997 to 2013 one can see that two industries have grown substantially: processed food and petroleum products. Petroleum in particular—along with chemical manufacturing which is largely dependent on petroleum—has risen dramatically. In 1998 ten industries were larger. Today, only one is. This rise in dominance of one industry is responsible for some of our policy decisions, as politicians strive to address concerns of their industry constituents. Processed food, another industry with big gains over 16 years, has a similar impact, stalling legislation on labeling, fertilizer and pesticide use, ethanol and other initiatives.
The green economy, however, is providing a counterbalance by encouraging a wider range of manufacturing at home. US manufacturing has faced ‘outsourcing’ on a scale unimaginable in the 1950s through the 1970s, when ‘Made in America’ was proof of excellence and attracted higher prices throughout the world. One of the reasons for this is the information and telecom commodity war, which set the bar at price rather meeting fundamental human needs for security, water, food, transportation and energy.
As we rebuild an aging infrastructure, workers are needed at home across a wide swath of industries, skills and technologies. As an example, solar panel installation is rising while solar panel prices are dropping, largely due to foreign photovoltaics. However, solar requires manufactured panels on which cells are mounted, devices for ease of installation, converters to change solar DC (Direct Current) into household AC (Alternating Current), tracking devices so panels are facing the sun, data management to manage the flow of energy to the grid and more. In addition, such manufacturing requires installation, marketing, shipping, financing and maintenance, leading to jobs.
In spite of these successes, the term ‘green jobs’ came into disrepute. This is partly because such jobs did not end the Great Recession, and because the term was defined too narrowly, missing the growth of new technologies and robust supply chain to support them. Other factors —the costs of transportation; privacy and intellectual property concerns; rising wages in Asia; the costs of managing a global supply chain; climate risks in poorly protected areas; political risks due to changing policies; and consumer demands for products made in factories that support worker rights—are combining to bring large industries back to US soil, creating a mix to rebalance our economy.
New Services to Manage Security and Efficiency
The green economy could not have happened without the IT and Telecom revolution. Managing infrastructure requires a massive amount of data, which must be collected, interpreted and managed. In the last year alone, up to 70% of US new sources of electricity generation came from wind and solar. These ‘bits’ of energy—which are intermittent due to sun and wind conditions—have been incorporated into our energy grid, much of which was built a hundred years ago. Designed in an analog world, a network of wires connects substations and transformers, sending electrons hurtling at unbelievable speeds in unimaginable quantities, toward our homes and businesses. Making this integration possible is the job of innovators who are:
- Creating new digital hardware and software to locate and manage failures in analog equipment before—or when—they occur. Hard to imagine but much of our energy, water and transportation infrastructure can only be accessed by a utility worker, one unit at a time. This inefficiency accounts for a loss of as much as 16% of our water, and lost productivity due to electrical and transportation downtime.
- New businesses are analyzing and managing how resources are used. Pioneered by corporate ‘early adopters’, high priced digital dashboards were designed to collect, manage and interpret data. These dashboards are now available—at a much reduced price—for business, communities, municipalities and educational institutions. No longer the realm of the Fortune 1000, organizations of all sizes are finding a partner to help maximize the use of resources, reduce costs and economically comply with regulations—especially new standards in cities.
- Corporations are developing products and services needed to manage their own usage or to comply with regulations. Some are then turning those into revenue centers. These technologies are bedrock: they provide the goods and services that we cannot live without. As we have let the basic industries falter, we lose the essential edge that only secure food, energy, water and transportation can provide.
Growing the Green Economy
The question then, is how to support growth of the industries that are the future? Since the late 1700ds, Government has helped manage risk in new technologies through bonds, deficits, taxes and tax policy, lead by innovation from the private sector. One of the early bonds, for the Erie Canal, came after intense lobbying, first from industry and then the state of New York. The petroleum industry has been the recipient of several kinds of incentives, including master limited partnerships (MLP), which have the benefits of partnerships, but can be traded as if they were securities. MLP’s are not yet available for renewable energy projects, in spite of extensive lobbying. Another is the $32.8 billion annual value of all known U.S. state and federal fossil fuel exploration, production, and consumption subsidies in 2014.
However, in the green economy the role of government has become muddled. In the US, the smooth working of the market is inhibited by a patchwork of federal, state, city and even regional regulations on water, agriculture, energy and transportation. What is urgently needed are policies that support certainty.
To create certainty in the market, the United States needs a national policy that would set goals for energy, water conservation and efficient transportation. Such a policy could include:
- Long term, predictable standards. Industry tends to fight new standards, yet flourish once those standards are announced and enforced. The auto industry—management and unions—fought mileage standards (Cafe standards) for cars and light trucks for years. Yet once in place, they radically changed the auto industry, encouraging low emissions, greater mileage and the development of ‘smart’ cars. The auto industry has now rebounded, with union and management leaders now praising the standards.
- Long term, predictable tax policies. The PTC (Production Tax Credit) expired in 2013 but was retroactively reset for 2014. This kind of on and off again legislation is hard on businesses that must plan budgets well into the future. Some green economy advocates call for the end of such credits, believing that their uncertainty is harming the marketplace.
- A ‘Green Bank’ Modeled after existing state policies, such as that in Connecticut, a Green Bank would support innovation with loans that are repaid, allowing the Bank to then lend to another firm. Such banks combine public policy with technical and financial expertise from the private sector.
Price on Carbon
There are two ways to price carbon: one is to tax emissions over a set amount and the other is to cap emissions—set a limit—and then allow organizations to either meet that cap and pay no money, exceed that cap and sell credits to another company, or fall below the cap and buy credits from a company that has exceeded their cap. Both have mechanisms to use some—or all—of funds collected to support innovation in clean technologies.
In the US, one example is SOx cap and trade. Fred Krupp, President of the Environmental Defense Fund (EDF) and Miriam Horn’s book, Earth: The Sequel cited the impact of SOx (Sulphur Oxides) regulations. Originally, the government sought to address the problem through the 1977 Clean Air Act by requiring ‘scrubbers’, a flue-gas desulpherization unit that was expensive. Scrubbers were not the only technology around to reduce emissions, so the requirement was dampening innovation in the field.
Mr. Krupp and The Environmental Defense Fund, among others, lobbied heavily for a sulphur cap and trade, where a company could use any technology that fixed the problem. In his book, Mr. Krupp recounted a conversation with the then CEO of PG&E, who praised the law. He said he had been very skeptical but now had “a dozen proposals for emissions reductions from my own employees on the shop floor and a dozen more from outside consultants.” He concluded that the environment had become a profit center. GE admitted that their passable scrubbers were dramatically improved as the law created a market for efficient solutions, of which scrubbers were only one. What the law did, instead of stifling industry as expected, was create innovation that solved a problem while making money for companies creating, installing and using new technologies.
Regulations are not going away. The question is not how to stop them, but how to incent and support innovation. Currently regulations are promulgated by agencies and then battled over in the courts. This is neither efficient nor is it helping grow the market which can supply the world with products and services critically needed in any healthy economy.
Climate change is a symptom of much larger changes happening across our planet. Around the world populations with a growing desire for a better life threaten to overwhelm planetary resources such as water, food and clean air. In the US, the quality of our lives and hopes for our children are being affected by increasing obesity, diabetes, heart disease and cancer; widening income gap due to a lack of growth opportunities for the middle class; finance that is still chasing the latest bubble instead of investing in the future; and a government that has been unable to bring real solutions to the table. In its relative infancy, the green economy is supporting reforms that can make us the manufacturing and financial lion we have been for two centuries. A failure to take advantage of this moment could well be a slide from which we cannot recover.