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Business Model Innovation
Another way to transform energy
By Elizabeth Bailey and Catherine Wolfram
Until 2008, most people paid for rooftop solar panels upfront, laying out $15,000 to $60,000. That cost limited the residential solar panel market to cash-rich homeowners, restricting growth.
Then came solar leases, which allow customers to make monthly payments of as little as $100 and pay nothing upfront. The result: The market has opened up to a new group of homeowners, and third-party-owned residential solar installations have taken off. In California, the biggest solar market, most customers are now opting for third-party installations.
Energy innovation typically calls to mind a scientist in a lab, working with new materials for solar photovoltaic cells or a new enzyme to convert plant matter to biofuels. As important as such technology innovations are, another kind of innovation is crucial to meeting the challenges associated with energy use.
We’re talking about innovations in business models and practices—everything from how a company runs its own business to innovative ideas for starting new ones and creating new markets. When companies embrace novel approaches, they open new opportunities for drastically reducing energy consumption or expanding the use of alternative sources of energy, as solar panel leasing demonstrates.
So, how can we ensure that innovative business models continue to transform the energy sector?
Companies have the incentive to innovate if they can reap the rewards of their creativity by offering a unique product or service. Unlike technological innovations, such as a new solar cell, business-model innovations, such as the idea of leasing, often cannot be protected with a patent or kept secret from competitors. After all, many solar installation companies now offer solar leases.
As a starting point, we need to recognize the importance of business-model innovations in the energy industry. For example, solar installations are subsidized through a number of federal and state programs, which lower the price to customers. While some question promoting a technology working its way up the development curve, it’s useful to recognize that subsidies also encourage business-model innovation and can enable better business models to be fully developed when scientists perfect the technology.
Standard setting also can encourage business-model innovation. Consider commercial office space loans. Recent research by our Haas colleagues suggests that office building owners and lenders would benefit if loans recognized a building’s energy costs. Commercial developers would profit by making their buildings more energy-efficient, and lenders would reduce their exposure to the risk associated with large fluctuations in future energy costs. This, in turn, could spur more building retrofits and the adoption of energy-efficient technologies, such as new windows that reduce the heat that passes through the glass.
At present, however, it’s difficult for lenders to incorporate energy efficiency into commercial underwriting decisions because they don’t get good information on a building’s energy consumption. To evaluate risk, underwriters need standardized reports to help determine if an investment would use more or less energy compared with peer buildings. Setting such standards would encourage lenders to take advantage of new opportunities in commercial underwriting.
Once again: No scientist, no lab, no technology breakthrough. Just a new way of thinking about what a business does, and how it does it. That’s how business-model innovation can address today’s energy challenges.
Elizabeth Bailey is executive director of the Energy Institute at Haas and Prof. Catherine Wolfram is faculty director.