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5 ways boards of directors can support sustainability

Published September 17, 2014
5 ways boards of directors can support sustainability

While corporate responsibility has risen as a strategic priority for many companies, boards have not been driving this change. The UN Global Compact LEAD board program conducts extensive surveys and interviews with board members, which have revealed some significant key areas where board members often are not aligned. Those key areas are what sustainability means, what value it brings to the company, whether it adds to (or subtracts from) profit and innovation, what the risks and opportunities of sustainability are and who the most important stakeholders are for the company’s success or failure.

Why is this mismatch a problem? When companies do not manage their sustainability risks, they can lose the license to operate or fail to foresee resource risks and market opportunities, and therefore become unprofitable in the long term. Some sustainability-related investments have a longer-term ROI horizon, which may reduce short-term profitability. However, as boards are responsible for protecting the long-term interests of their shareholders, it is part of a board’s fiduciary duty to understand and consider these risks and opportunities.

The board’s engagement with the company’s sustainability risks sends a strong message to company leaders and employees. If the board is not aligned in its views on corporate sustainability, how can the company expect everyone else to be aligned?

Misalignment on corporate sustainability often results in the overuse of company resources on sustainability efforts, with little value in return. With no clear direction and no apparent interest from the board, sustainability teams can spend valuable time and resources focusing on managing "simple" issues while avoiding those lurking in the blind spots.

Five key practices the board should adopt

To help companies that want to realize the benefits of getting aligned on corporate sustainability, here are five key practices that boards should adopt.

1. Show leadership on sustainability. Boards should establish alignment on what sustainability means for the company and what the company’s business case for sustainability is. This is critical if the board is to drive leadership on sustainability. Boards should set short and long-term sustainability targets — just as they do for financial targets — and ensure that the company’s sustainability strategy and performance are communicated at annual meetings and investor roadshows

2. Establish the right incentives. The right incentive structures are essential to the success of a sustainable strategy. Boards should incorporate sustainability priorities into both the recruitment and remuneration of executives. They also should ensure that leadership and employee performance indicators are designed to incentivize behavior that is sustainable and creates value for the company.

3. Establish a culture of integrity. Boards can help establish a culture of integrity by placing emphasis on communication about sustainability, and by setting an example in how they deal with tough trade-offs between short-term profit and long-term value creation. According to a recent UN Global Compact survey, only 29 percent of companies align government affairs (such as lobbying) with their corporate sustainability commitments. Ensuring that all external communications are aligned with sustainability strategy is essential in establishing a culture of integrity.

4. Oversee implementation and communication. Boards should oversee the implementation of the sustainable strategy and ensure that key targets are being met. They should also take responsibility and accountability for the company’s communication on sustainability issues to stakeholders. This will ensure that management prioritizes sustainability issues, and will add legitimacy to sustainability information in the eyes of stakeholders.

5. Stay informed. It is essential to be aware of changes in the regulatory landscape, keep up-to-date with best practices and understand what peers are doing. Listening to stakeholders is also key: Secure and review a rigorous stakeholder dialogue process identifying current and future issues material to the company, or invite experts and stakeholder representatives to sit on a sustainability advisory board.

Create illumination

As a board member, you can make a big difference by encouraging alignment. Here are a few questions you could pose at your next board meeting to get the conversation started.

  1. Are we aligned on our understanding of the value of our sustainability efforts?
  2. Are we demonstrating the leadership we want to see from our C-suite members?
  3. Are our current incentives motivating the right behavior or are we sitting on a ticking bomb?
  4. Are we establishing a culture of integrity or do we not always practice what we preach?
  5. Are we taking an active role in the implementation and communication of our sustainable strategy?

Once you shine a light into each part of your sustainability efforts, you can start to rule out the possibility of threats that would make company leaders say, “Why didn’t we know?”

Top image of boardroom by hxdbzxy via Shutterstock



Businesses double down on carbon pricing while Capitol Hill idles

Published September 16, 2014
Businesses double down on carbon pricing while Capitol Hill idles

Putting a price on carbon is not at the top of Congress’s to-do list. The 113th Congress has made no secret of the fact that it is both unable and unwilling to reach a consensus on climate change action.

As of August 2014, legislators had introduced 221 bills focusing specifically on climate change — 134 that are meant to advance climate action, as well as 87 that would hinder it, according to the Center for Climate and Energy Solutions. Of these 221 bills, only 13 deal specifically with the issue of putting a price on carbon — and more than half of this number aim to prevent that from ever happening.

Despite the lack of a congressional consensus, there is a growing global corporate consensus that carbon will be priced, and boardrooms across the country are preparing for a robust, internationally-linked carbon market. These companies would welcome regulatory certainty, nationally and internationally, when it comes to climate change policy and carbon pricing.

According to a new report by CDP, 29 major public companies in the U.S., including Dow Chemical Company, Goldman Sachs and ExxonMobil are now incorporating an internal carbon price into their business decisions. CDP gathered the data from corporations in response to its annual request for information on the business implications of climate change.

CDP researchers first noticed the carbon pricing trend last year as they evaluated the 2013 CDP filings from companies listed in the S&P 500, in addition to similar data from global companies. In December 2013, CDP showcased this data point for the first time in a groundbreaking white paper.

Business opportunity

Critics may cling to the claim that a price on carbon would be economically deleterious, but 638 companies disclose that regulations related to carbon pricing (cap-and-trade & carbon taxes) present an opportunity for their businesses. Several businesses already use carbon pricing to guide their internal and external capital deployment to maximize return on investment.

Companies implementing carbon pricing run the industrial gamut, including utilities, energy businesses, technology companies, airlines, transportation companies and financial services firms. Wal-Mart, Walt Disney, Co. and Microsoft are some of the other notable brands to have voluntarily gone this route.

This year, ExxonMobil continues to place the highest price on carbon; it assumes a cost of $60 to $80 per metric ton by 2030. Mars prices carbon at $20 to $30 per metric ton. Microsoft’s metric is $6 to $7, Google uses $14, while Disney’s range is $10 to $20. The general rule seems to be that the longer the life of an asset, the higher the price on carbon.

As was the case last year, companies are setting their prices according to what might happen or is already happening within their areas of operation. Programs in California, for example, tend to follow the state’s cap-and-trade program’s prices of $14 to $15 per metric ton. Major companies such as Alstom, Bayer and Canadian Tire Corporation are keeping a close watch on emerging Chinese emissions trading systems that will soon be pricing carbon on a mandatory basis.

Mandatory requirements

Many major U.S. companies are participating in the European Union Emissions Trading Scheme (EU ETS) and are already operationalizing a carbon price on a mandatory basis. Some European firms, such as Lafarge and Rockwool International, want stabilization and improvement of this system, which puts a price on carbon on a mandatory basis, to help protect long-term investments and improve profitability.

In June, CDP published a paper seeking to answer questions that arose in the wake of the 2013 white paper, including:

Why are these companies using a carbon price?

How are these prices calculated, and how to do they function as internal costs?

Do carbon prices drive strategy and investment?

What are the implications of the use of these prices for investors, companies and policymakers?

Answering these questions through the voices of senior corporate leaders, the report adds depth to the data outlined in the December white paper.

Rob Bernard, Microsoft’s chief environmental strategist, said the company’s carbon fee model supports a culture of innovation and efficiency. Microsoft is promoting the efficient use of resources and purchasing renewable energy, and hopes to set an example by driving accountability through its internal carbon pricing and carbon fee model. Bernard added that Microsoft is only able to adopt this model because it benefits the overall productivity and profitability of the company.

Beth Stevens, Ph.D., Disney’s senior vice president of corporate citizenship, environment and conservation said attaching a financial value to carbon has incentivized Disney’s businesses to reduce their greenhouse gas emissions and to think creatively about new approaches and technology that will help reduce their carbon footprint. The company has seen three consecutive years of record financial performance, even after putting a price on carbon.

Many of these companies are not stopping at internal corporate reform. Some 212 businesses are directly engaging with policymakers on carbon-pricing legislation. They state that their corporate position is in support of establishing a cap-and-trade system and carbon tax. With little political will on Capitol Hill to take any kind of cohesive action against climate change — much less put a price on carbon — it may be up to these forward-looking firms to continue to lead the charge to a more sustainable economy, and world.

Top image by Ungnoi Lookjeab via Shutterstock.



How companies can integrate ecosystem services into due diligence

Published September 16, 2014
How companies can integrate ecosystem services into due diligence

Even though a relatively small group of companies currently consider their impacts and dependencies on ecosystem services, such an approach has become part of international best practice.

The reason is simple.

Since January 2012, leading financial services and lending institutions—such as the World Bank Group’s International Finance Corporation (IFC) and the Equator Banks—now require that preapproval due diligence consider corporate impacts on ecosystem services, within the IFC’s Performance Standard 6 and the Equator Principles.

In addition, the issue is gaining the attention of governments around the world. Sixty-eight countries have explicitly named ecosystem services as an issue on which they are working. And some are formulating policies to address these, as detailed in a recent BSR report on the public sector uptake of ecosystem services concepts and approaches.

The private sector is also engaging with these issues. For example, 47 multinational companies have explicitly named ecosystem services an issue that they are either exploring or working on. Some even are integrating it into their corporate policy, as a recent BSR report. detailed These corporate activities cover a broad range. Some companies have crafted corporate policies of “no net impact” or “net positive impact” on ecosystems or ecosystem services. Other firms are placing monetary values on natural capital and ecosystem services. Still others are embedding ecosystem services into corporate management systems. The takeaway is that companies are now considering a broader range of environmental issues, including those related to the functioning of ecological systems.

As the private sector increasingly considers the structure and function of natural systems—and the flow of ecosystem services, key questions around how to assess impacts remain. Most notable are the questions of:

  • How should my company assess ecosystem services impacts and dependencies in business decision-making processes?
  • Are there rigorous, feasible methods that will result in relevant insights on business risk and opportunity?
  • Do these methods mesh with existing corporate methods for conducting impact assessments or assessing risk (such as those based on reputational risk, creditworthiness, or other forms of risk at the project level through the enterprise level)?
  • What is the emerging state of practice in applying these methods and conducting an assessment of a company’s (or facility’s) impacts and dependencies on ecosystem services?

To help businesses apply ecosystem services concepts, a growing set of analytical tools and approaches have emerged over the past several years. For example, methods for enterprise-level risk review include the Natural Value Initiative’s (NVI) Ecosystem Services Benchmark (ESB), which asks whether key processes are in place. Additional methods exist to identify key ecosystem services impact areas, such as the World Resource Institute’s (WRI) Corporate Ecosystem Services Review (ESR), as well as dozens of other tools, analytical methods, and databases relevant for more granular assessment of corporate ecosystem services impacts, as detailed in a BSR report published earlier this year. This proliferation of methods presents businesspeople with the question of which analytical approach to apply and why they should choose one over another.

In response to this often confusing state, BSR convened thought and practices leaders—through our Ecosystem Services Working Group annual roundtable—to explore the emerging state of business practice on how companies can assess their impacts and dependencies on ecosystem services. The resulting “snapshot” of the current state of corporate practice on integrating ecosystem services into corporate assessments are summarized in a new working paper from BSR .

Specifically, the paper presents an overview of the current components used to conduct corporate ecosystem services impact and dependency assessments. This focus on various components of undertaking an ecosystem services assessment is due to the reality that many companies already have detailed risk assessment protocols—and few are seeking more new processes. Adding new components to existing processes tends to have more appeal for many businesspeople. It is also more practical given the wide range of issues and contexts across industries, companies, and project types.

The key components of a corporate impact and dependency ecosystem services assessment that leading practitioners highlighted, through BSR’s research process, as key to ecosystem services assessment processes include:

  • Screen to determine whether a detailed ecosystem services impact and dependencies assessment needs to be conducted, typically using trigger questions, general rules of thumb, and guidelines.
  • Scope to ensure that the assessment focuses on the most relevant issues and also generates insights into trade-offs associated with ecosystem dynamics and ecosystem services in environmental, social, and economic contexts.
  • Gather baseline data, collect new data in the field, and/or obtain existing data from third-party sources, which relate to present and potential future scenarios of ecosystem structure and function and could in turn affect the flow of ecosystem services.
  • Assess corporate impacts and dependencies on ecosystem services over time, including reviewing the relative importance and/or ranking of impacts and dependencies for various ecosystem services beneficiaries.
  • Develop mitigation and management plans, including monitoring, as well as an implementation plan and an operationalization budget for personnel with the appropriate skills or training.

As with any snapshot of an emerging area of practice, the components of ecosystem services assessments will likely continue to evolve. This means that companies now have the opportunity to explore and adapt this work over the coming months and years. During this time, more business leaders and investors will seek to take action on their impacts and dependencies on ecosystem services.

Top image of Pantanal landscape in Brazil by Filipe Frazao via Shutterstock
 



CH2M Hill, Nature Conservancy aim to grow green infrastructure

Published September 16, 2014
CH2M Hill, Nature Conservancy aim to grow green infrastructure

Today, CH2M Hill and The Nature Conservancy are announcing a five-year collaboration “to bring innovative and integrated engineering and environmental solutions into the global marketplace.”

Or, to put it in plain(er) English: to grow “green infrastructure.”

Green infrastructure is a term finding increasing resonance in an era of urban and climate challenges. It is distinguished from “gray infrastructure” — the concrete-intensive edifices, often laden with pipes, pumps and other devices, that are the foundation of our cities, coastlines, roadways and waterways.

Green infrastructure, by contrast, harnesses natural systems to address the same challenges, such as stormwater management, heat islands, biodiversity, food production, air quality, clean water and healthy soils. For example, building marshes and oyster beds to protect a coastline by absorbing some of a storm surge's energy. Or planted roofs, which reduce toxic runoff, cool cities and clean the air.

This is not new stuff — pilots, prototypes and full-blown systems have existed for decades — but green infrastructure is coming into its own, viewed by cities, planning agencies and developers as economical and environmentally beneficial. But they are still largely underutilized tools.

Which is what CH2M Hill, a global engineering firm, and TNC, a nonprofit advocacy group, hope to change. The partnership “brings together complementary capabilities,” explained Jeffrey North, Senior Advisor of Corporate Practices for The Nature Conservancy, citing “TNC's science and policy strengths with CH2M Hill’s design, engineering and building capacities. We’ve got scientists who can give you mathematical precision on the ability of an oyster reef to stop storm energy, but we don’t build a lot of those all by ourselves. We need partners to do that.”

The plan focuses on four regions in North America: the West Coast, the post-Sandy region of the Eastern Seaboard, the Gulf of Mexico and the Upper Mississippi and Great Lakes.

The two organizations already have worked together in two of these areas. For example, in Howard Beach, in Queens, N.Y., TNC retained CH2M Hill to study how natural infrastructure addresses climate change impacts on coastal communities, including those in urban areas. The final report described the impact on climate risks and community resilience, measured the financial benefits of the infrastructure’s ecosystem services and laid forth a range of financing options.

The two are also partnering in the Gulf Coast on a project involving oyster reefs to mitigate storm surges. The ultimate client for that work is, perhaps appropriately, Shell.

The Howard Beach and Gulf Coast projects became touchstones for what’s possible at a larger scale, and the two organizations set out to create a more strategic relationship. TNC and CH2M Hill recently held a summit in Washington, D.C., to look at project opportunities across North America.

“We have said this will be a global endeavor, but will focus on North America right now both for efficacy and start-up common sense,” North told me last week.

Green infrastructure has an attracting allure — use nature to replace steel and concrete! — but the field is still in its infancy. “We're early in the curve,” said Matthew Wilson, Senior Principal Consultant at CH2M Hill, who’s heading up the partnership for his company. “The market is still testing out the viability of these approaches, both from a practical standpoint of do they work. And also, importantly, are they cost-effective over the near-term, the mid-term and the long-term? Those are the kind of key questions that our teams are going to address together.”

A litany of outcomes

It’s not just coastal wetlands and flood plains. Green infrastructure has potential just about anywhere. For example, says North, the revitalization of both the Los Angeles River and the Chicago River are simultaneously addressing water quality, stormwater control, habitat value and the community value those bodies of water can offer.

Another example, close to home for North, is in Cambridge, Mass. “There is a constructed wetland a mile from my house. It was built to address combined sewer overflow problems and get closer to compliance. It save the city of Cambridge a lot of money over the gray infrastructure alternative.” (North pointed out that this was not a TNC or CH2M Hill project.)

The Cambridge project generated a multitude of benefits, he says. “It’s a gorgeous area where you would take your family for a picnic. The habitat value is evident to anybody who walks by and observes the flora and fauna, the biodiversity in this five-acre parcel. There are carbon sequestration benefits that we could calculate, and local air quality and climate regulation value for the residents and businesses adjacent to this place.”

That’s a typical litany of outcomes, says North. “What we find with green infrastructure is that we get all these extra benefits that are often overlooked. And, conversely, they are overlooked when a natural asset is lost to gray development or gray infrastructure. We get a lot more back when we look at green infrastructure for specific problems and realize that there are all these co-benefits that come with it.”

The alternative would have been a water treatment facility — concrete, pumps, pipes, chemicals and a crew 24/7 to monitor the operations. Says North: “We know that the business case for that facility versus the green alternative, which doesn’t require a crew 24/7, is very, very compelling.”

From reefs to roofs

The benefits of such projects aren’t limited to large, public-sector projects. There are green infrastructure opportunities in the private-sector, too. One example is a Dow project in Seadrift, Texas, that cost about $1.2 million to do the job that would have cost $40 million if the company had built a traditional engineered wastewater treatment plant. The wetland also provides habitat for deer, bobcat and birds, even alligators.

“For private-sector entities, all of a sudden you find value that hasn’t been codified in the permitting books, and it is not on the options list for an engineering firm or a vendor that comes to you with solutions,” says North.

For example, he says, consider a green roof. “If you are a facilities manager, the option of a green roof for a new building or a retrofit might not even occur to you because you’re not aware that the roof lasts longer, provides value to your employees who look out on it, has heating and cooling benefits for the building and has all kinds of stormwater benefits for the company and the municipality. There may be education benefits, which are pretty small compared to saving money on heating and cooling. But not a lot of organizations have that on their list of options or alternatives.”

North is quick to acknowledge that green infrastructure isn’t always the ideal solution. “A green roof isn’t going to work in every situation, and an oyster reef won’t work on every coastline for storm defense work.”

Still, there’s great promise here with potentially attractive bottom-line benefits. Assessing those are a large part of what TNC and CH2M Hill hope to assess. “One of the goals of this partnership is to take this to scale,” explained CH2M Hill’s Matthew Wilson. “One of the key theses of natural infrastructure is that when you move to scale, that's where the strengths of bringing these natural systems comes in. So for example, instead of just doing a small strip of a coastline, take an entire bay and look at hundreds of acres of wetlands, coastal reefs and other things. The scale issue is really promising as we look forward.”

Cooking with gas

I asked North and Wilson to envision how their partnership might advance the field over the next two to three years.

Having projects in the works in all four regions would be a start, replied Wilson. Beyond that, “We're absolutely going to be monitoring success, and what works and what doesn't work. And sharing that with the market through professional societies, white paper presentations and general thought leadership.”

Another sign of success, said Wilson, would be “a flow of capital and projects at scale” — for example, “the entire Puget Sound or an entire region, which is going to require capital, resources and managing that so that we're testing this out at scale.”

He added, “I think what we're forming here is a lasting relationship where we can learn from each other's organizations and really have cross pollination of ideas and techniques. They can learn from us about project management and we can learn from them about science. So, our people meeting one another, working together and doing cool projects together to shift the dial in both of our organizations.”

“We want to say nothing less than we changed the menu,” responded TNC’s North when I asked him to look a few years out. “Green infrastructure is now on the menu, we’re developing the list of entrees and we’re proving out what goes best with those menu choices.”

Second, he said, “We will have put this on the action-item list for facilities managers as well as engineering firms, and we’ll have this proliferated into policy circles. It’s going to be a hot topic with engineering associations. And getting it into the curricula of engineering schools, so when engineers come out they’re at least familiar with green infrastructure and it’s in their consideration set.”

North quickly admitted that all this is ambitious, but that’s the point. “We’re doing nothing less than changing the way society addresses infrastructure challenges. This is a big, big deal. As you know, municipalities and private-sector entities all over the world are looking at a big replacement bill. Lots and lots of infrastructure is wearing out and needs to be replaced. I don’t think we’re going to use logs and vines to replace the Golden Gate Bridge, but there are lots of places where we can use natural solutions to complement engineered ones for longer-life infrastructure that brings other benefits, and very likely have a lower up-front bill."

He added: “If we can do all that, we’ll be cooking with gas."

Learn more about resilient cities at VERGE SF, Oct. 27 to 30. Top image of manufactured oyster reef via coastalresilience.org.

Also in The Two Steps Forward Blog:


How 3 biodiesel companies defy the odds in a challenging industry

By Donna Walden and Kelsey McCutcheon Fitzgerald
Published September 16, 2014
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Tags: Waste Reduction & Recycling
How 3 biodiesel companies defy the odds in a challenging industry

While biodiesel companies across the United States await government decisions on updates to the Renewable Fuel Standard and Blender’s Tax Credit, the Western Sustainability and Pollution Prevention Network checked in with three West Coast biodiesel companies for an insider’s look at the state of the industry. Of the 297 biofuels companies currently operating in the U.S., we chose three — Pacific Biodiesel, Bently Biofuels and SeQuential Pacific Biodiesel — because they share a feedstock of used cooking oil and a passion for protecting the environment.

In addition, each one of them is standing strong in uncertain times, surviving conditions that have forced many other biodiesel companies out of business. This article will touch briefly on each company, the challenges that they face, their secrets to success, why it’s important that the biodiesel industry survive, and what we can do to help the biofuel industry succeed.

How three biodiesel companies got into the biofuels industry

The founders of Pacific Biodiesel, Bently Biofuels and SeQuential Pacific Biodiesel each entered the biodiesel industry for different reasons, but eventually came to the same conclusions: creating fuel from used cooking oil helps the environment, reduces our dependence on fossil fuels and makes good business sense.

Pacific Biodiesel, located in Kahului, Hawaii, is the oldest biodiesel company in the United States. For founders Kelly and Robert King, the impetus for entering the industry was a desire to put a waste product to work by recycling used cooking oil into a fuel source and keeping it out of the Central Maui Landfill. At the time, little was known about the possibilities for biodiesel, so the Kings worked with researchers from the University of Idaho to develop methods for converting used cooking oil into fuel.

They built the first biodiesel plant on site at the Central Maui Landfill in 1995 and have been successfully diverting cooking oil from the landfill ever since. “Last year, we went through the process of figuring out how much FOG (fats, oils and grease) we’d kept out of the landfill,” said Kelly King. “It was something like 22 million gallons. For a small island, that’s pretty big.”

[Learn more about alternative energy at VERGE SF 2014, Oct. 27-30.]

During the past two decades, Pacific Biodiesel has helped to design and build twelve other biodiesel facilities, including plants for Bently Biofuels and SeQuential Pacific Biodiesel on the mainland U.S..

Bently Biofuels, located in Minden, NV, was founded in 2002 by Don Bently, out of concern for rising petroleum fuel prices. “In 2002 Don Bently had the foresight to say that oil was going to get to $100 a barrel,” said Carlo Luri, Director of business development for Bently Enterprises. “Oil was trading for about $25 a barrel back then. And that was the historic high, so nobody in their right mind would have even forecast or predicted that oil could have quadrupled in price. It only took five years for that to happen.”

Bently, an entrepreneur and industrialist, opened a plant for biodiesel production on his family ranch in 2005. In 2006, he began to market and sell the product in California. Today, the nine-person team at Bently Biofuels sells biodiesel to customers in Northern Nevada and California from fueling stations in Minden, Reno, Berkeley and San Francisco.

SeQuential Pacific Biodiesel, currently operating out of Salem, OR, began production in Eugene, OR, in 1998 as Eugene Biosource. Tyson Keever, one of SeQuential’s three co-founders, was initially attracted to the “do-it-yourself” nature of biofuels production. “You could make it at home in your garage,” said Keever. “It was just very empowering and tangible.”

In 2002 Eugene Biosource became Sequential Biofuels. In 2005, they partnered with Pacific Biodiesel to form a joint venture called SeQuential Pacific Biodiesel. Today, SeQuential Pacific Biodiesel produces more than six million gallons of biodiesel a year at its plant in Salem, and sells fuel from more than 30 retail locations across Oregon and Washington. To date, the company has displaced 10,250,000 gallons of petroleum, offsetting 189,700,664 pounds of CO2 emissions.

Challenges facing the biofuels industry today

As gasoline prices increase, so does the appeal of alternative fuels; and like gasoline, alternative fuel prices can fluctuate based on a variety of political and economic factors.

National Average Price Between
April 1 and April 15, 2014

 

Fuel

Price

Biodiesel (B20)

$4.01/gallon

Biodiesel (B99-B100)

$4.23/gallon

Electricity

$0.12/kWh

Ethanol (E85)

$3.41/gallon

Natural Gas (CNG)

$2.15/GGE

Propane

$3.31/gallon

Gasoline

$3.65/gallon

Diesel

$3.97/gallon

Table 1. The Clean Cities Alternative Fuel Report provides regional alternative and conventional fuel prices for biodiesel, compressed natural gas, ethanol, hydrogen, propane, gasoline and diesel. See all price reports. Source: Alternative Fuel Price Report, April 2014 (PDF) .

Biodiesel is currently more expensive per gallon than gasoline and other alternative fuels. One reason for this discrepancy is that the other fuels are better subsidized. The Blender’s Tax Credit, which is a fixed $1-per-gallon tax credit given to the first fuel blender of a volume of biodiesel that contains at least one-tenth of one percent petroleum-based diesel fuel, has been inconsistent. Every two years, the Blender’s Tax Credit expires and has to be re-authorized by Congress. At the end of 2013, it had not been reauthorized for 2014, according to Carlo Luri of Bently.

“If we don’t get that $1 tax credit, it’s basically a dollar out of somebody’s pocket,” said Luri. “Either the customer has to pay $1 more or we have to make due with $1 less. Trying to run a biofuel business with $1 less per gallon for revenue means that most biodiesel companies are operating in the red.”

If the Blenders Tax Credit is reauthorized for 2014, companies can be paid retroactively. Luri explained that this has happened several times in the past but there is no guarantee that it will happen again. This uncertainty makes it difficult for many biodiesel companies to compete with the petroleum industry.

“Petroleum subsidies are embedded in federal statutes, so they don’t have to go back every two years and ask for them,” said Kelly King of Pacific. “All of the renewable fuel subsidies and incentives are short-term. They have to be voted on every two to four years, and that’s not conducive to creating an industry where investors want to know what their return on investment is going to be for the next five years.”

Luri also described another hurdle that biodiesel producers face: the price of yellow grease (another name for used cooking oil) dropped almost 40 percent between 2013 and early 2014. “Financially, that is very damaging to the companies that are trying to recycle the oil, because you have a fixed contract to buy the oil from the restaurant at a certain price,” explained Luri. “Your collection costs are more or less fixed because you’re paying salaries, insurance, fuel, depreciation on the trucks, and meanwhile the price that you can sell that oil into the market is down 40 percent.”

Limited feedstock is another major challenge facing the biofuels industry, according to Tyson Keever of SeQuential Pacific Biodiesel. Feedstock prices fluctuate dramatically, making it difficult for biofuels companies to maintain a sustainable business operations model. “Go back five years, most of the industry across the country made biodiesel from soybean oil,” said Keever. “Today, a lot of new sources of feedstock are coming to market. Corn oil has taken a significant market position, and more fats, oils and greases, recycled cooking oil and tallows are coming to market.”

All three companies think that it is unlikely that biofuels would ever replace petroleum because there aren’t enough soybeans, corn, or used cooking oil to meet our country’s demand for fuel.

U.S. EPA’s proposal to reduce the mandatory volume of biofuels blended or sold into the nation’s fuel supply for 2014 is another policy change that is expected to have an adverse effect on the biofuels industry. Each year the EPA is required to set standards for the Renewable Fuel Standard program and determine the national volume of biodiesel that will be required. If the EPA were to reduce the required volume of biodiesel for the coming year, this would be the first time the agency scaled back its ambitions since the RFS program began in 2007.

Changes in state policy affect biodiesel companies as well, but the biodiesel industry is receiving some support from the courts. “The petroleum industry, the food industry and other refineries are united in the attack on biofuels, and most of that is focused by attacking the programs that are put in place to incentivize biofuels,” said Carlo Luri of Bently. “In California, the Low Carbon Fuel Standard is under attack, and at the federal level the Renewable Fuel Standard. In the last 8 or 10 months, there have been a number of rulings coming down from the courts of appeals that are standing in support of renewable fuels. So the attacks are there, and they do have an impact, and it tends to slow things down and stall things and sometimes impact prices.”

Stay local

To remain in business during these tumultuous times, each of the three companies shared a common strategy: stay local.

“Our strategy has been to focus on a community-scale model, with an emphasis on being able to compete without tax credits,” said Tyson Keever of SeQuential Pacific. “We have a large used cooking oil collection company where we go direct to the back door of the restaurant. We try to stay within 500 miles of our production facility. We sell most of our fuel as locally as we possibly can, and as far down the fuel-shed as we can to the end user.”

Kelly King, operating from a small island in the mid-Pacific, concurred. “You’ve got to look at your local resources,” said King. “You don’t want to be shipping feedstock from the other side of the country, or from outside the country. We always focus on ‘local is better’, ‘smaller footprint is better.' It’s better for the environment, it’s better for the economy, and socially it’s better because people have jobs locally.”

At Bently Biofuels, which was founded on the principal of self-sufficient farming, they believe that locally-produced fuel provides great benefits to the community, including cleaner emissions, proper disposal of waste, displacement of petroleum and domestic energy security. The more fuel we can make locally, the less we need to obtain from unstable parts of the world, like the Middle East.

Unexpected benefits of biodiesel

Biodiesel’s economic impact includes helping restaurants to make money by properly disposing of waste.

“We don’t often get credit for this, but restaurants have saved millions of dollars, maybe even billions if you look across the nation, from going from the model of paying haulers to pick up their used cooking oil and grease trap oil, to getting paid for it or getting it picked up for free,” said King. “Since 2010, we’ve saved the restaurants on Maui over $1,000,000 in fees. Restaurants are starting to see their waste oil as a commodity, rather than a waste”.

In Hawaii, where resources (and landfill space) are limited, biodiesel is especially important because it provides an opportunity to prevent pollution while putting a waste product to good use.

Many biodiesel users see increased business as customers actively look to do business with environmentally friendly companies.

"Since 2006, we have been fueling with 100 percent biodiesel”, said Erik Stein, owner of Extended Horizons, Maui’s top green dive operator. “Customers seek us out because consumers are now looking for businesses that are actively protecting the ocean and earth. The benefits have flowed to our bottom line as biodiesel burns cleaner than petro-diesel, reducing our engine maintenance costs."

“Converting restaurants’ recycled fats, oils and grease (FOG) into biodiesel is a great way to divert waste, reduce pollution and support local businesses,” said Asia Yeary from U.S. EPA Region 9. “Communities in Hawaii and elsewhere also benefit from this renewable resource because it significantly reduces asthma-causing soot, sulfur dioxide and greenhouse gas emissions.”

Pacific Biodiesel, SeQuential Pacific Biodiesel and Bently Biofuels have successful business models that support their communities, reduce C02 and greenhouse gas emissions, and keep fats, oils and grease (FOG) out of our sewers and landfills. Public awareness is the best way to keep these companies in businesses.

Anyone can use biofuel

Many people confuse biodiesel with vegetable oil, and believe that only specialized or “converted” engines can use biodiesel. In truth, biodiesel can be used in any diesel engine, if the appropriate blend is selected. Biodiesel can be used alone as “B100” (100 percent biodiesel) or mixed with petroleum diesel and blended into many different concentrations.

According to the National Biodiesel Board, biodiesel blends of 20 percent and below will work in any diesel engine without engine modifications. If the blend has been properly treated by the biodiesel company, it will work year round, even in cold climates. B20 (a blend of 20 percent biodiesel, 80 percent petroleum diesel) provides similar horsepower, torque and mileage as diesel. Blends of 5 percent biodiesel and lower meet the ASTM standards for diesel fuel and don’t require any special considerations.

For gasoline-powered vehicles, a different type of biofuel — bioethanol — can be used. The E10 blend (10 percent bioethanol and 90 percent unleaded gasoline) can be used in any gasoline engine. Higher blends require a specialized engine.

Another myth is that using biodiesel will void a vehicle’s warranty. The U.S. Department of Energy Handling and Use Guide (page 37) states that federal law prohibits voiding of a warranty just because biodiesel was used.

Biodiesel should not cause engine problems. "We've been using B20 since 2006, averaging a million miles a year on our biodiesel-fueled vehicles, with no issues," said Kelvin Kohatsu, Fleet Administrator for Hawaiian Electric Light Company.

The best way to support the biofuels industry is to use biodiesel in your diesel-powered vehicles and bioethanol in your gasoline-powered vehicles. Use the U.S. Department of Energy’s Alternative Fueling Station Locator to find a list of fueling stations around the U.S.

Top image by Mejidori via Wikipedia.

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Retail Horizons: Will fracking constrain business growth?

Published September 16, 2014
Tags: Energy, Retail
Retail Horizons: Will fracking constrain business growth?

This article is the sixth in a 12-part series about the future of U.S. retail for the Forum for the Future-led 2014 Retail Horizons project in partnership with Retail Industry Leaders Association. For more about the project and the toolkit available in October, read the first post, which also contains a table of contents for the series.

How we produce the energy we need, how much it costs and how we use it will all have profound consequences for the future of retail business growth and the transition to a sustainable economy. Among other things, these factors strongly will affect supply chains, manufacturing and consumer confidence.

Although the energy system is too vast and complex to quickly summarize, a peek at one aspect of it — fracking for oil and gas — hints at the myriad ways in which changes underway could affect the future of retail and sustainability.

Driven by new horizontal drilling and hydraulic fracturing technologies, the production of natural gas and oil within the United States has seen huge growth. In just a few short years, the U.S. has gone from being a net oil importer to a net oil exporter, something that seemed inconceivable a decade ago.

At a moment when conventional oil supplies were feared to be peaking, conflict in the Middle East threatens to disrupt production and China is competing with the West for resources, this unexpected windfall has helped prevent a surge in fuel and electricity prices.

The consequences are that long and complex supply chains remain feasible, energy-intensive commodities such as aluminum are plentiful and consumer confidence has been rising. Beyond the fracking boom towns in places such as Williston, N.D., the new energy supply has been driving manufacturing job growth in long-depressed Rust Belt cities such as Youngstown, Ohio.

However, fracking is highly controversial and its future is uncertain. Fracking has been shown to contaminate groundwater and cause earthquakes. Fracking operations also leak methane, a potent greenhouse gas, and the scale of these "fugitive emissions" may be far greater than previously thought. Finally, although boosters have claimed that fracking could supply U.S. energy needs for 100 years, there is increasing evidence that the recent boom could be a bubble about to burst. The U.S. Energy Information Agency recently admitted that the recoverable oil in the Monterey shale formation in California is probably 96 percent lower than previously estimated.

Should the fracking bubble pop, we could expect to see a shortening of supply chains, rising commodity costs and a decline in consumer confidence and spending. It is impossible to depict this future with certainty, however, which is why the Retail Horizons project developed a set of four scenarios to explore how these and other factors will influence the future of retail.

Top image of sunset on an oil rig by Stephen Coburn via Shutterstock.



How Tennant sought to flourish through innovation

Published September 15, 2014
How Tennant sought to flourish through innovation

H. Chris Killingstad was vice president of a struggling 132-year-old company when he went to an industry trade show in 2002. His company, Tennant, made floor cleaning equipment using technology first developed during the Great Depression.

"When I walked into the room, I saw hundreds of different machines that looked exactly the same, except for their colors," he said. "I realized that we had to do something to differentiate ourselves."

Today he is Tennant's CEO. The company's stock has risen 300 percent since 2002, more than five times faster than the Dow Jones Index.

How did he do it? With a lean, clean and green strategy aimed at contributing to a healthier world. He did it in the face of enormous doubt from customers and competitors who wondered whether "chemical-free cleaning" would pay off. Not only did his gamble prove technically sound, but his vision has inspired and engaged customers and employees.

Tennant exemplifies a new breed of business. It competes on environmental performance — not just the "20 percent less energy and CO2 emissions by 2020" kind, but radical innovation that represents a breakthrough for both customers and investors.

The company's electrolysis-based water technology, ec-H2O, provides user benefits that include eliminating the cost of chemicals and reducing the risk of slip-and-fall accidents by avoiding chemical residues on floors. As Tennant explains it, the technology oxygenates water and electrically converts it into an ionized solution that has both acidic (sanitizing) and alkaline (cleaning) properties. Its ec-H2O line of floor-cleaning products dramatically has outpaced industry sales and helped the company to achieve record profits.

Business needs a new norm

From car company Tesla to fast-moving consumer goods maker Unilever and home improvement retailer Kingfisher, growing numbers of industry leaders are redefining what it means to be a sustainable business. For them, sustainability is no longer about incremental change aimed at reducing harm. They are shining examples of business as an agent of world benefit. Their purpose is to have a "net positive" impact on society and the environment while reaping above-average financial rewards.

What can you and your organization do to become an agent of world benefit? Case Western Reserve University, where I work as an associate professor of organizational behavior, has produced new research that suggests untapped opportunities exist in two areas.

Credit: Tennant

First, businesses must replace the tired notion of sustainability with the much more inspiring one of "flourishing," aimed at creating the world we all want rather than the one we just get by in. Would a healthy marriage be described as sustainable? No, we would want to describe it as doing well or thriving. Flourishing engages and motivates people in an entirely different way from most corporate sustainability efforts. The Tennant vision was not about minimizing harm from the use of chemicals. It was to eliminate chemicals altogether.

Second, businesses need to pay more attention to personal well-being — to whether people are able to feel "whole" at work and to feel treated as human beings rather than fungible resources. We need work environments in which people's values line up with their organization's values to enable them to live purpose-driven lives. Mindfulness and other reflective practices can help people deal with workplace stress by reconnecting them to what they care deeply about. Cultivating emotional and spiritual health is the next frontier in corporate excellence.

Why is this so important? Surveys of the American labor force reveal that over 50 percent of employees identify themselves as disengaged at work, with a further 18 percent saying they are actively disengaged. A blunt May 31 headline in The New York Times reads, "Why you hate work." It detailed white-collar dissatisfaction, including factors such as the lack of meaning and significance in jobs.

More generally, business is suffering from an image problem. Corporations bounce from accusations of fraudulent financial practices to environmental disasters, from claims of low hourly pay to promoting products seen as of questionable value to consumers.

How to get started on a new path

It is time to recognize that narrow short-term ROI calculations for environmental performance and social responsibility are no longer enough. We must change who leaders are being, not only what they are doing.

Not surprisingly, companies already are demonstrating that being an agent of world benefit can give a big boost to the bottom line. Google, General Mills, Fairmount Santrol, Clarke and GOJO Industries are among the new breed proving the business value of full-spectrum flourishing, starting with the inner well-being of their people.

Case Western Reserve's Weatherhead School of Management will host its third Global Forum for Business as an Agent of World Benefit from Oct. 15 to 17. H. Chris Killingstad from Tennant will be there. Top image of flourishing tree by Porojnicu Stelian courtesy of Shutterstock.



How a risk-screening tool can set up solar for success

Published September 15, 2014
Tags: Finance
How a risk-screening tool can set up solar for success

Rocky Mountain Institute (RMI) and the truSolar working group have developed a risk-screening tool targeted toward middle-market commercial solar projects.

According to Jamie Mandel, manager at RMI, commercial rooftop and ground-mount systems, which can range from 10 kW to 1 MW, are not financed as often as they should be.

The small- and medium-sized companies and developers that provide these systems do not have FICO scores to attract sufficient debt financing. They are also too small for project finance. The middle-market customers seeking to install these systems may include family companies and small chain stores.

Many of these projects lack a standardized risk assessment profile, a common language and a shared industry standard to reduce obstacles. These missing pieces contribute to a lack of information which makes lenders skeptical about the risks involved.

Distributed Sun’s chief executive officer, Chase Weir, said standards are lacking for projects downstream in the value chain where buyers and sellers transact.

“NABCEP is a good example of a widely accepted standard further up the value chain that provides a nationally recognized procedure to certify engineers who design these systems," Weir said. "Further down the value chain, there is not currently a standard approach to evaluating investment risk.”

RMI and the truSolar working group have created a framework which, if adopted by all counterparties in deals, will lead to substantial benefits, Weir said. “When counterparties to deals you’re doing – and counterparties to deals you’re not doing – all implement the same truSolar framework, the whole industry can enjoy economies of scale,” he said.

Expanded scale

The truSolar score is similar to Carfax, a commercial service that provides vehicle history reports to individuals and businesses.

Another similar example comes from the telecom industry. Not too long ago, major telecom companies convened a working group and realized that each company conducted business differently. This was preventing them from scaling up. This realization resulted in the creation of Code Division Multiple Access (CDMA), which has now become a standard technology for 3G high-speed mobile use.

The introduction of CDMA brought mobile smartphones to the global market, which was not yet a trillion-dollar market at that time. CDMA helped to scale the mobile phone industry up to reach a hundred-billion-dollar market.

TruSolar will serve a very similar function. A universally-accepted standard would potentially open up the solar market to reach more customers in the next 10 years.

“Solar is a billion-dollar market that wants to become a trillion-dollar asset class,” Weir said. “Markets don’t accomplish this scale without transaction standards. There is an inevitability to it, but it takes time. Until everyone agrees on the rules and protocols, we’re holding back growth.”

truSolar will provide these rules of the road and create formulas to quantify risk.

Benefits of truSolar

One big question is: What effect will this tool have on the cost of capital?

Weir said he expects the tool to produce direct benefits such as increased conversion rates, reduced professional service fees, lower soft costs and transaction costs, and ultimately, a healthier market with more mature businesses and sustainable margins.

Wide-scale adoption of the tool may also impact other drivers of soft costs. For instance, this may lead to better understanding of the solar asset class in the lender and securitization markets and subsequently reduce the cost of capital.

By increasing adoption of solar power through more efficient primary markets, truSolar enables securitization and competition. This may reduce the weighted average cost of capital by several hundred basis points, Weir said.

The unlevered after-tax cost of capital today is 8 to 10 percent, Weir said. Securitization and the emerging yieldco structure is driving the cost of capital to 4 to 6 percent.

Some companies are already achieving these low costs of capital, but these are the billion-dollar scale companies, which are limited in number. According to Weir, truSolar’s vision of democratizing an institutional best practice, not just among large companies but for mom-and-pop businesses and new market entrants as well, may be achieved by 2018.

Although this statement paints a positive vision of solar’s future, Weir noted that the truSolar group did not view the tool as a direct means of lowering the cost of capital.

RMI wants to reduce the cost of solar, Mandel said. RMI is interested in the accurate pricing of risk and the reduction of transaction costs rather than the lowering of risk.

Mandel said reduced transaction costs could lower the cost of solar by 40 cents per watt.

Currently, most projects proposed in the solar industry do not get financed. The truSolar team is hoping to reduce deal dropout rate, which was built into this 40-cent reduction in cost.

It is possible that banks may not trust a self-scoring tool like truSolar; this may create opportunities for private companies to offer third-party verification and auditing services.

The truSolar working group has not determined who the third-party verifier will be.

According to Mandel, Distributed Sun has created an affiliate company, called beEdison, that will be providing commercial products based on the truSolar score. RMI feels that having an initial commercial partner is critical to long-term success, and ultimately hopes that others will seek licenses as well.

Working group and peer review

The truSolar working group was formed in late 2012. It kickstarted efforts by identifying leading companies along the industry value chain. These companies include materials, racking, panel and inverter companies; financiers; insurance companies; and rating agencies.

In the past 18 months, 1000 professionals and eight firms in the industry have provided feedback on the tool’s functionality and accuracy.

According to Weir and Mandel, it is critical that the working group transition to an independent industry body, called the “accreditation body,” which will manage a living standard and act as the final arbiter on risk scoring and algorithm management.

RMI, the chair of the organizing committee, is currently drafting bylaws and structuring a sustainable revenue model to establish truSolar as an independent 501(c)6 entity.

Trust and transparency are a priority and are paramount for widespread adoption, according to Weir. It has not been determined yet whether truSolar will partner with an industry body or remain independent.

Looking forward, Weir said he anticipates the tool will have a positive effect on the market and open channels for improved information, understanding and communication. These direct benefits will indirectly reduce soft costs and a lower cost of capital.

Weir and Mandel said that as the truSolar tool moves through the peer review process and is launched into the market, they will be prepared for challenges.

Mandel said he expects adoption will be one of these challenges. “Adoption means the tool is relevant, trusted and accurate.”

Technical accuracy could also be a concern, as well as business model structure.

“A business model that focuses too heavily on preserving revenue streams will not build trust,” Mandel said. “At the same time, if the business model is too open, you run the risk of destroying incentives or introducing competition.”

The working group completed the alpha phase this spring. This resulted in a list of over 800 attributes to evaluate risk.

These attributes included construction, operation and maintenance provider, location, sunlight, component products, contract structure and financing approach.

The recently completed “beta phase” focused on quantifying attributes, designing algorithms and narrowing in on which attributes quantify risk best.

At this stage, the tool combines over 400 attributes. TruSolar is taking this a step further to create a score so that this information can be easily interpreted by industry stakeholders, especially lenders.

Ultimately, lenders must understand risk factors so that they can accurately assess project viability, Weir said.

One essential function of the tool is a pre-screening test to determine if and when a project is worth full due diligence. The test will include about 150 questions.

The tool will identify problems and generate a prescriptive recommendation based on the user’s inputs, while stressing profitability.

Weir said that this profitability assessment is not just based on formulaic measures like internal rate of return – or pre-tax or after-tax, levered or unlevered financing.

“The tool evaluates risks to generating kilowatt-hours and cash flow and helps investors understand how to reduce, eliminate and transfer risk, or accept risks,” Weir said.

This article originally appeared on Clean Energy Finance Forum and is reprinted with permission.

Top photo of solar installation by Elena Elisseeva via Shutterstock



What you should know about Greenpeace's Lego campaign

Published September 15, 2014
What you should know about Greenpeace's Lego campaign

A few years ago, we wrote about Greenpeace targeting Mattel. Through its “Ken dumps Barbie” campaign, Greenpeace was able to “force” Mattel to avoid using controversial packaging sources at that time (mainly Asia Pulp and Paper).

This year, Greenpeace has set its sights on another manufacturer of children’s toys: LEGO, that venerable institution of childhood, the one that helped us learn how to build, then destroy, all sorts of objects. I can’t think of a pediatrician’s office or day care center I visited when my children were young that didn’t have a LEGO table and building blocks. To coincide with the release of "The LEGO Movie," Greenpeace created its own LEGO movie called "Everything Is Not Awesome." This 1:46 minute video has over 5.5 million views.

Technically though, it isn't really going after LEGO, but after the oil companies. In fact, it notes on its website that “LEGO has pledged to phase out the use of oil and replace it with a sustainable alternative by 2030.”

So this begs the question, why doesn't it just go after oil companies directly? Well, it has protested against Shell, but I’m sure you hadn’t heard much about those efforts before the LEGO initiative. It seems Greenpeace hasn't had much success going that route. Greenpeace garners awareness through creativity that grabs the attention of popular media and gets traction on social media. It’s easier to do this by leveraging a surprising, well-loved target like LEGO.

More importantly, what Greenpeace is trying to do is get the attention of "Concerned Parents," the mainstream sustainability segment that we at the Shelton Group describe as making up about one-third of the American market. Greenpeace is “asking parents and LEGO fans to stand up for the Arctic and call on LEGO to cut ties with Shell.”

The strategy certainly has garnered attention (5.5 million views is impressive), and over 866,000 people, or roughly 16 percent of viewers, actually have signed the petition. But based on the fact that "The LEGO Movie" is currently the second highest grossing movie of the year, I’m not sure that Greenpeace has struck a strong chord with parents.

The problem may be that the issue is so far removed from the targeted product. The campaign targets LEGO’s supply chain, not a hazard directly associated with its products. That doesn’t create the same alarm as toxic content or some other health hazard.

Additionally, LEGO has made public pronouncements toward sustainability — with goals that even Greenpeace acknowledges. So it’s possible some parents see this action by Greenpeace as unfair.

LEGO appears to be standing its ground. LEGO’s response to the matter seems to sum up the view that it is being unfairly targeted: “We firmly believe that this matter must be handled between Shell and Greenpeace. We are saddened when the LEGO brand is used as a tool in any dispute between organizations.”

The lesson here for other marketers is that high-profile successes (such as a kid’s movie based on your product) can put you on activists’ radar screens — particularly if your product or supply chain aligns with its agenda. But if you’re doing the right things, and directly and transparently address the concerns, you can withstand the storm, and attention eventually will shift to other issues.

So before launching any major advertising campaign or high-profile tie-in partnership, it’s a good idea to get your sustainability house in order and carefully consider all aspects of your business, including your supply chain.

Top image of a Lego tree by Katie Walker via Flickr

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Building a smart city, one streetlight at a time

Published September 15, 2014
Building a smart city, one streetlight at a time

Learn more about smart cities at the GreenBiz VERGE Salon in New York City tomorrow, and at VERGE SF, Oct. 27 to 30.

The vision of a smart city decked out with millions of sensors feeding useful information to city officials and citizens is almost out of science fiction. To reach that point, though, it’s best to focus on something much more prosaic, such as helping citizens find parking spaces or switching out the bulbs in streetlights.

Cities around the world have long-range initiatives to reduce greenhouse gas emissions and better prepare cities for severe storms and other climate disruptions. But in most cases, achieving those goals with top-down, technology-driven projects is bound to stumble, said Charbel Aoun, president of smart cities for Schneider Electric.

“As much as we believe technology is critical to enabling smart cities, we avoid talking about technology,” said Aoun. “Smart cities is about cutting-edge innovation, but cities don’t like innovation — they can’t afford to fail.”

Instead, city officials need to modernize their infrastructure one chunk at a time and create a technical architecture that allows them to integrate their IT systems with their operational systems — electric and water grids, transportation systems and other infrastructure.

Schneider holds meetings with city officials to discern their priorities and then seeks out a project that can demonstrate some sort of energy savings, such as building efficiency upgrades. Ideally, those savings can fund further work. “You have to sell the value to the mayor, the management and the different department heads,” Aoun said. “It’s the basement connecting to the data center connecting to the mayor’s office.”

Light-bulb moment

The challenge for many cities is that once a city decides to install Internet-connected equipment, it quickly exposes organizational problems.

Consider streetlights. City departments are expert at operating streetlights and know who suppliers are and when upgrades are needed. But what happens when an LED street light is also a platform for providing wireless Internet access, security cameras and air quality monitors?

The streetlight goes from being a piece of equipment managed by the energy or traffic department to a high-tech device that needs to be integrated into back-office IT systems and monitored for network security. Rather than have the traffic department manage this equipment, it’s best for IT departments to have responsibility, said Aoun.

Buy-in from the budget keepers

Financing new initiatives is a challenge for cities, many of which face big budget deficits. The City of Boston managed to finance a number of energy-efficiency initiatives by getting two types of budget people to talk to each — those in charge of capital expenditures and those in charge of operating budgets.

Credit: Martin LaMonica

By demonstrating that a building efficiency project could reduce operating budgets, for instance, the city was able to free the funds from the capital budget for a number of efficiency upgrades, said Todd Isherwood, an energy project manager for the City of Boston, who spoke at an event organized by Schneider Electric. An upgrade to LED street lights was able to save a substantial amount of money when utility rebates were figured in.

“The savings opens up a discussion,” Isherwood said. “None of my colleagues will move on the budgets unless there is money that can be saved.”

Those efficiency projects have led to a broader initiative to benchmark all of the city’s buildings and report their energy performance data. Once all the information is collected and consolidated, facilities managers can start to prioritize efficiency upgrades or make simple behavioral changes, such as deciding on how best to turn heating and cooling off at schools.

Over time, the city will get data on which buildings have combined heat and power units and can operate independently in the case of power outage, Isherwood said. Those buildings could act as shelters in the case of a prolonged outage.

A few cities in Europe have plans to create a “city operating system” that will allow developers to create applications with sensor data. But most cities don’t have the resources or the technical staff sophisticated to take on these types of grand projects, said Laurent Vernerey, CEO of Schneider Electric in North America.

“If (a smart city project) is not something thing that will be visible to the citizen, it’s going to be difficult,” Vernerey said. “As a mayor or city manager, how can I make their life easier? When they find an angle like this, then it opens doors very quickly.”

Top image of LED streetlight in San Luis Obispo, Calif., by emdot via Flickr



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