Meeting the Innovation Challenge in a Green Future

Companies that want to lead the way in cleantech could do worse than look to the example of Thomas Edison. The Wizard of Menlo Park didn't invent the light bulb; he invented an industry. He knew the light bulb by itself would have remained merely a curiosity. So, while inventors around the world worked only on the bulb, he conceived an entire network of generators, meters, transmission lines, and substations. Most important, he showed how all those elements could be combined into a profitable business and demonstrated its commercial viability in the carefully circumscribed market of Lower Manhattan. And he won favorable regulatory treatment to help make it possible.

In many ways, going green today is like going electric was a century ago: The challenge isn't just to invent technologies; it's to create an entirely new industry. For cleantech startups as well as established companies, Edison's approach is a blueprint for industry creation, with its four interdependent components: an enabling technology, an innovative business model, a careful market-adoption strategy, and favorable government policy. By coordinating all four elements, companies can effectively test the viability of their cleantech concepts in the right context, with sufficient scale and minimum investment.

One company that is following that path today is Better Place, with its comprehensive approach to creating a mass market for electric cars. Electric vehicles have been around for more than a century, but until Better Place's founder, Shai Agassi, came along, nobody had figured out how to bring about their mass adoption.

How Far to the Next Recharging Station?

Previous attempts had focused on technology, and even more narrowly, on the conundrum of battery life. But Agassi, like Edison, thought about the more fundamental question—what would it take to make electric cars as convenient and affordable as those powered by gasoline? When viewed that way, it was apparent that to make electric cars do the job that gas-powered cars do requires a completely new system: an extensive network of easy-to-use charge spots, automated switching stations that rapidly replace depleted batteries with fully charged ones, and software to regulate the power grid and direct drivers to charge spots and switching stations before the battery dies.

The second piece of the solution—an innovative business model—resulted from former President Bill Clinton's observation that the electric car needed to compete not just for new-car buyers but for the far larger market of used-car buyers. Here Agassi really needed to be creative—cars were expensive, and electric cars far more expensive than gas-powered ones. But electricity was cheap compared with gasoline. Agassi realized that if he turned a profit on the fuel, he could radically subsidize the cars, much as cell phone carriers sell minutes and heavily subsidize the phones. Buyers would have less reason to settle for a used gas-powered vehicle when they could have a brand-new electric one for less.

Like Edison in lower Manhattan, Better Place is attempting to demonstrate the commercial viability of its new system in carefully circumscribed markets—what Agassi calls "transportation islands." The initial test of its managed network of charge spots and switching stations will take place in Israel later this year. Meanwhile, the company placed an order with Renault for 100,000 switchable-battery electric vehicles for Israel and Denmark from 2011 to 2016. Better Place will start building a third network in Australia, beginning in Canberra in 2011. In Japan, the company is currently demonstrating the feasibility of battery switching with Tokyo's largest taxi operator, where three switchable-battery electric taxis have been running for almost two months. And looking toward the future, the company is working with government officials and local partners in the San Francisco Bay Area, Hawaii, and Ontario, Canada, as well as in Japan, China, and France to implement similar EV networks.

In all of those cases, Better Place has been able to put in place the fourth piece of the puzzle for innovation—enlightened government policy to drive both supply and demand. In Israel, which has pledged to be oil independent by 2020, the company will benefit from lower taxes on electric vehicles and escalating taxes on gas-powered cars. The project in Tokyo, whose taxis emit 20 percent of all carbon dioxide from vehicles in the city, was commissioned by the Japanese Ministry of Economy, Trade and Industry. The story is similar in the other target locales, each of which has a particular interest in making the transition to electric vehicles.

The shift from fossil fuels toward clean and renewable energy will bring profound changes to virtually every industry. Consumption habits, manufacturing and distribution systems, financial models, regulatory environments—all will change. In these shifting conditions, opportunities to innovate will abound. To seize them, companies will need more than a single light bulb going on overhead.

Before it's here, it's on the Bloomberg Terminal.