Cleantech Perspectives

Resiliency to climate change: Cleantech's other value proposition

The resiliency imperative

Scientists and business leaders are increasingly warning that current rates of global greenhouse gas (GHG) mitigation are an insufficient response to the threat of climate change. PwC's research shows that keeping global temperatures from rising above 2°C by 2050 would require at least a 5.1% reduction in global carbon intensity per year for the next 37 years -- quite a jump from the 0.8% a year average decrease of the last 10 years.¹ As PwC’s own research suggests, “Governments’ ambitions to limit warming to 2ºC appear highly unrealistic.”²

If some significant amount of climate change seems inevitable, then it is imperative that society develops adaptation strategies to make the global economy more resilient to the shocks, disruptions, and costs of climate change impacts. Indeed, the US is already experiencing these costs. The average annual costs of climate-related disasters and extreme weather events like Hurricanes Katrina and Sandy have increased from a few billion dollars in the 1980s to consistently over $200 billion a year.³ Building more resilient energy and water infrastructure to withstand these extreme weather events will likely be critical to minimizing economic losses, keeping critical power infrastructure up and running, and protecting human life.

We believe that the cleantech industry has a major role to play in this initiative, and that this role begins with developing a new value proposition: resiliency.

Resiliency: the new narrative

Historically, the cleantech sector's value proposition has centered on "clean" -- on dramatically reducing emissions while providing superior performance and lower costs compared to fossil fuel counterparts. An installer of rooftop solar PV panels might, for instance, have discussed how its panels helped customers cut their GHG emissions, save money through lower monthly utility bills, and "do their part" for the environment. These messages stress efficiency and savings.

In the last three to four years, the industry's value proposition has grown to incorporate "smart". Smart products promise to both help the environment and to improve users' experiences through new features, greater connectivity, and more information. Smart meters in the home, for instance, combine the advantages of lower monthly energy bills ("clean") with the ability to identify how energy is consumed throughout the home, compare one's energy use with one's neighbors, and other features ("smart"). These messages stress better user experiences and greater insight.

While we believe that these two value propositions will continue to be important for cleantech companies, we also believe the value proposition should now include a third lever. Leading cleantech companies have already begun to incorporate components of a "resiliency" value proposition -- such as self-sufficiency, security during disasters, and adaptability -- into their products and services. Below we will examine two case studies that highlight the resiliency value in electric vehicles, small-scale renewables, and energy efficiency.

Electric vehicles: an unconventional power source

Electric vehicles (EVs) are a prime example of a clean technology with resilient attributes. In Superstorm Sandy’s aftermath, EV and hybrid owners found they had two distinct advantages over conventional autos in navigating the week-long blackouts and gasoline shortages.

First, it was easier to fuel up on electricity than gas. The storm’s blackouts and flooding not only disabled the pumps at gas stations, but also shut down two of the region’s six refineries and their fuel truck fleets. This shutdown rendered 80% of New Jersey’s gas stations useless and left large areas without access to fuel. People were forced to line up for hours, waiting for their gasoline rations.⁴ In contrast, even though millions of people lost power in the storm, the map for electricity outages resembled more of a patchwork quilt of towns without power. While an EV owner’s home might have lost electricity, (s)he could easily drive to the next town to “fuel up” at a public charging station or a friend’s home.

Second, enterprising EV owners used DC-to-AC converters to power refrigerators and other critical appliances for up to three days from a single charge of their vehicles’ batteries. This creative engineering made sheltering Resiliency to climate change in place more comfortable, and allowed the EV owners to store perishable food that would have otherwise spoiled.

Small-scale renewables & efficiency: security during a crisis

There is also a resiliency value proposition in products that reduce consumers' reliance on the electrical grid. Consumers can make themselves more resilient either by developing their own supply of energy (renewables) or by minimizing demand (efficiency).

The resiliency logic of distributed, local, small-scale renewables is quite evident. Superstorms like Sandy may wipe out power across large areas for long periods of time. Those consumers with small-scale renewables and storage systems available, such as roof-top solar PV panels and microgrid power management systems, can endure storms, floods, and other disasters with minimal or no disruption to their energy supply.

Pittsburgh-based Consolidated Solar demonstrated the power of small-scale renewables during Superstorm Sandy. The company teamed with Solar City to lease a number of small solar generators that provided power to citizens in blacked-out zones throughout New York and New Jersey.⁵ A similar logic has been applied to larger facilities; New York City’s Co-op City, located in the Bronx, used a combined heat and power (CHP) system to maintain power in homes, schools and shopping centers during Sandy.⁶

Consumers may increase their resiliency by combining these small-scale renewables with highly efficient appliances and demand-side resource conservation. A highly efficient refrigerator, for instance, allows a family to shelter in place longer and with fewer difficulties, even during intermittent power outages. Similarly, the use of cisterns to harvest rainwater during a storm can help conserve potable water for drinking -- or can provide more drinking water with use of a filtration system. In the case of extreme disasters, simple efficiency solutions such as these can dramatically improve a family's ability to weather a disaster.

Implications for the industry

We are seeing leaders in the industry, such as Consolidated Solar, beginning to incorporate resiliency themes into the value propositions of their products and services -- and we believe it is now time for the rest of the cleantech industry to assess how they may do so as well. The science of climate change tells us that formerly "hundred-year" storms will likely become more regular, so the market for comprehensive resiliency solutions is likely to be great. Those companies that incorporate resiliency into their value propositions could soon discover it is a key differentiator of clean technologies from traditional energy generation and resource management technologies.

However, incorporating resiliency into the value proposition is not simply a matter of changing one's messaging. The message is important, but truly investing in resiliency means looking into product design and innovation (e.g., can an existing product be better designed to meet resiliency needs and/or could a new product fill the need), customer needs (e.g., what the latest climate science identifies as future resiliency needs), and go-to-market strategy (e.g., are particular regions especially able to benefit from these products).

Cleantech companies are ideally suited to provide the products and services that will help humanity become more resilient to the challenges of climate change. Those organizations that take a holistic view and incorporate all these elements into their resiliency efforts are the ones that are most likely to benefit from the value that resiliency provides to the marketplace.

Conclusion

Building these capabilities will take time, but successful renewable developers have the opportunity to build efficient O&M into the foundation of their companies. They should be comforted that other industries have tackled the same problems in the past and remember to look to them for guidance. Moreover, because they are dealing with generating assets, renewable operators can do something that other industries can’t – turn O&M into a source of value. The capabilities above provide a platform to optimize O&M and look for opportunities that actually increase system output and drive incremental revenue.

¹ PwC, “Too late for two degrees? Low Carbon Economy Index”, November 2012.
² PwC, “Too late for two degrees? Low Carbon Economy Index”, November 2012.
³ IPCC, 2012: Summary for Policymakers. In: Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation [Field, C.B., V. Barros, T.F. Stocker, D. Qin, D.J. Dokken, K.L. Ebi, M.D. Mastrandrea, K.J. Mach, G.-K. Plattner, S.K. Allen, M. Tignor, and P.M. Midgley (eds.)]. A Special Report of Working Groups I and II of the Intergovernmental Panel on Climate Change. Cambridge University Press, Cambridge, UK, and New York, NY, USA, p. 7.
⁴ Bradley Berman, “Electric Car Owners Unfazed By Storm”, The New York Times, 2 November 2012.
⁵ Peter Kelly-Detwiler, "Mobile Solar Generators - One Man's Odyssey to Bring Power Back to New York", Forbes, 14 November 2012.
⁶ William Pentland, "Lessons from Where the Lights Stayed on During Sandy", Forbes, 31 October 2012.

Contact

Clinton Moloney
Managing Director, Sustainable Business Solutions
(415) 498-8442
clinton.a.moloney@us.pwc.com

Tripp Borstel
Manager, Sustainable Business Solutions
(415) 498-7343
tripp.borstel@us.pwc.com

Jeremy Lardeau
Manager, Sustainable Business Solutions
(408) 817-5098
jeremy.o.lardeau@us.pwc.com

Ryan Mullen
Associate, Sustainable Business Solutions
(408) 817-4286
ryan.mullen@us.pwc.com

© 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Climbing the renewables O&M learning curve – Lessons from utilities and telecom for solar and wind asset managers

As the pace of renewables installations continues to accelerate, developers and independent power producers are finding themselves responsible for growing portfolios of operating assets. Most developers know to set aside 1-5% of all-in project costs for ongoing annual operations and maintenance (O&M), but are often unprepared to manage O&M to minimize cost and deliver the performance off-takers expect. And O&M costs can quickly add up, especially when considered in the context of a portfolio of several utility scale installations or dozens of megawatts of residential and commercial systems.

We’ve identified renewable O&M costs as a growing area of concern for the renewable energy industry and have singled out lessons learned from similar industries to help companies less familiar with O&M quickly climb the learning curve. In particular, two industries have met similar O&M challenges – telecom companies managing cellular tower assets and utilities managing central and distributed assets across a wide service territory. To gain a better understanding of the relevant issues, we spoke with seasoned PwC Directors in each industry who have extensive experience in O&M – Chester Lee covering utilities and Shailabh Atal covering telecom. They helped us develop recommendations in three key areas: 1) Establishing O&M organization fundamentals, 2) Reducing labor costs, and 3) Applying technology solutions.

Establishing O&M organization fundamentals

The bedrock to efficient O&M is establishing a solid organizational design that will provide the guidelines for all O&M activities. First, renewables companies with new assets coming online regularly should ensure that there are clear hand-off procedures between the deployment teams and the operations team at commissioning. Next, for operations, this means writing escalation policies that dictate how to respond to alarms of varying severity, including determining which alarms can be managed automatically and what levels of the organization should respond and when.

In the labor-intensive world of maintenance, empowering management at multiple levels of the organization may be even more important. A certain amount of standardization is required, but allowances also need to be made for local variation. Utilities have dealt with this for decades - procedures that work in the urban environment of San Francisco may not be optimal in the mountains of the High Sierra. Therefore, they have set up networks of regional and divisional headquarters that allow process variation for geography and local preference. But, they also track costs very closely – if a division’s costs for a particular type of job outstrip the average, they have to explain the variance. Leading utilities have also set up Centers of Excellence that experiment and identify leading practices for adoption across the network.

Lastly, utilities and telecom companies rely on ticketing systems that signal the severity of maintenance issues and enable workflow optimization. For example, in a residential setting, a ticket level of P1 could indicate a safety issue that should be addressed immediately or at least within 24 hours. A ticket level of P2 could indicate a system outage which must be addressed within 72 hours to maintain customer satisfaction. Finally, a ticket level of P3 could represent an underperforming system that needs to be cleaned or investigated the next time a resource is in the area.

Reducing labor costs

As a first step, maintenance costs can be limited by leveraging a robust system design, using reliable contractors and equipment, and installing systems so that points of failure such as inverters are accessible. Once systems are installed, companies have the opportunity to define their procedures to make the most of maintenance visits. One strategy borrowed from utilities is to define preventative versus as-needed maintenance schedules based on environmental factors. For example, panel cleaning in a desert environment can be scheduled based on wind activity. Telecom companies are taking things a step further by varying preventative versus reactive maintenance programs based on hurricane season in the Southeast – with the rationale being that some preventative maintenance can be reduced during hurricane season because reactive maintenance visits are likely to be required in response to storms.

Utilities and telecom companies have also spent decades fostering contractor relationships that encourage specialization and competition. In response to open bidding processes, multiple vendors emerge to fill highly specialized roles such as vegetation management at costs lower than the network owner could attain internally, simultaneously enabling strategic sourcing. Utilizing contractors for the majority of O&M labor has provided flexibility and access to labor pools of tradesmen as the need for skilled positions, such as electricians, ebbs and flows. Despite the benefits, utilization of contractors adds complexity around vendor management, site access and security. Governing site access can be particularly important for larger centralized installations with multiple contractors present and for rooftop applications where building owners must also be considered. Renewables system operators should consider fostering these vendor relationships up front and enabling them through proactive contract design.

Applying technology solutions

In the back office as well as the field, technology plays a critical role in reducing O&M costs for owners of distributed asset networks. The most well developed solutions that apply in both instances are schedule optimization, alarm management and mobile tools. Schedule optimization can reduce costs by improving labor utilization and increase service levels by managing the backlog of work. Vendors offer a wide variety of scheduling systems that can reduce driving time with optimized routes and enable intelligent, flexible scheduling combined with the ticketing system discussed above. For example, a crew returning from a P1 job may find a P3 ticket placed on their schedule in real time as it appeared on their route. Beyond software, this type of optimization requires good data on both sides – jobs and workforce. Visibility into both should be part of the design criteria for a new O&M program.

Related to schedule optimization, alarm management tools have been developed and implemented in the telecom industry to generate, coordinate, and manage alarms from field assets. In addition to providing real-time visibility, alarm management systems allow operators to pinpoint issues and facilitate the proper response, further reducing field and back office touch points.

Utilities are only now rolling out mobile technology for work crews, but as wireless communication networks leapfrogged wired networks in the developing world, renewables operators should seek to design O&M around mobile solutions from the start. GPS-enabled tablet and smart phone applications can vastly reduce the amount of time spent on data entry and paperwork, reducing strain on both work crews and the back office that supports them. These tools also allow schedules to be optimized on the fly as tickets are opened and closed in real-time.

Conclusion

Building these capabilities will take time, but successful renewable developers have the opportunity to build efficient O&M into the foundation of their companies. They should be comforted that other industries have tackled the same problems in the past and remember to look to them for guidance. Moreover, because they are dealing with generating assets, renewable operators can do something that other industries can’t – turn O&M into a source of value. The capabilities above provide a platform to optimize O&M and look for opportunities that actually increase system output and drive incremental revenue.

Contact

Brian Carey
US Cleantech Advisory Leader
(408) 817-7807
brian.d.carey@us.pwc.com

Chris McCloskey
Manager
(415) 498-8404
chris.mccloskey@us.pwc.com

© 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

"Fiscal cliff" legislation extends production tax credit, but sequestration hits section 1603 grants

Over the New Year’s holiday, Congress passed legislation to address the much-reported “fiscal cliff” of expiring tax provisions and automatic spending cuts. That legislation also extended and expanded many significant clean energy provisions.

Most importantly for the cleantech community, the new law extends the production tax credit ("PTC") for wind energy through 2013. The scheduled expiration of the PTC had brought new wind projects to a virtual halt, and the wind industry had advocated strongly for an extension.

Under the revised PTC, the 2013 deadline requires companies to "begin construction" rather than complete projects. This change applies to all types of renewable energy eligible for the PTC — not only wind facilities, but also biomass, geothermal, municipal solid waste, landfill gas, marine and kinetic energy, and certain hydropower facilities. Companies also can elect a 30% investment tax credit ("ITC") instead of the PTC for facilities that meet the 2013 "begin construction" deadline.

IRS guidance will be required to define what it means to “begin construction” in 2013, but many observers expect the government to use rules similar to those used for the Treasury section 1603 cash grant program. The new legislation also extends many additional business tax provisions through December 31, 2013 (see box at right). Several provisions were both extended and modified, and these changes are important for the cleantech community:

• Algae-based fuels are now eligible for the cellulosic biofuels producer credit and associated bonus depreciation.
• The plug-in vehicle credit is now specifically available for two- and three-wheeled vehicles.
• The energy-efficient homes tax credit has an updated construction standard.
• The new law clarifies that commonly recycled paper cannot qualify as biomass for the PTC.
• Tax credits for alternative fuels and alternative fuel mixtures are no longer cash-refundable.

Several other current or recently expired renewables provisions, including ethanol credits and the Treasury section 1603 grant program, were not extended. Tax credits for solar and fuel cells are not scheduled to expire until 2016 and, thus, were not addressed in the bill.

The new legislation also extends 50% bonus depreciation through 2013. Most renewable energy property is eligible for this bonus depreciation treatment.

This year creates critical opportunities to develop PTC-eligible pipeline

Under the new legislation, 2013 will likely be a critical year for developers of wind, biomass, and other PTC-eligible projects to begin construction on a pipeline of projects for delivery over the next several years. We anticipate development activity similar to that seen at the end of 2011 under the Treasury 1603 grant program, as developers seek to “grandfather” projects into the PTC (or ITC, after election). Another year of 50% bonus deprecation is also a welcome development for projects that will be completed in 2013, as it is frequently an important factor in overall returns from renewable energy projects.

Treasury announces that section 1603 cash grants will be subject to an 8.7% sequester

On March 4, 2013 Treasury announced that all awards made under the Treasury 1603 cash grant program on or after March 1, 2013 through September 30, 2013 will be reduced by 8.7% – regardless of when the application was received by Treasury. After Congress and the Administration failed to reach agreement on alternative means of achieving targeted budget deficit reductions, automatic across-the-board cuts in many federal programs (“sequestration”) took effect on March 1, 2013. Awards made prior to March 1, 2013 will not be affected. The 8.7% reduction will be applied until the end of the fiscal year (September 30, 2013), at which time the sequestration rate is subject to change. At this time, it is unclear whether grant applicants could be made whole for reductions in their awards if and when alternative budget measures replace the sequestration process.

Contact

Matthew Haskins
US Cleantech Tax Leader
(202) 414-1570
matthew.haskins@us.pwc.com

© 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership.
All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Ecosystem strategy for the smart grid

The electric power and utilities sector is under tremendous pressure to transform a system that's worked for over 100 years into a new, more complex, smart grid. High-speed two-way communications devices, disruptive technology, new regulations, changing customer behavior, new markets, new incentives, and new businesses are all forces driving to change the design of the grid - one of the great engineering achievements of the last century.

Where there are large drivers of change, there are also large opportunities. The best way to capitalize on these opportunities is to develop a smart grid strategy that aligns with key ecosystem players that result in delivering value to customers. Given the complexity and demands of this unique marketplace, a good smart grid strategy will consider the interdependencies of all the players in the ecosystem, and optimize how collective interests are bound together to deliver customer value in the new smart grid infrastructure.

The first step in designing such an ecosystem strategy is to assess the system in a cohesive and interconnected way.

The smart grid ecosystem in Figure 1 illustrates our perspective of the main player categories and the key relationships through which they influence each other. Utilities provide the electrical supply through generation, transmission, and distribution, while customers (residential, commercial, and industrial) provide demand/load for electric power. These supply and demand elements comprise the electric power grid. Within the ecosystem, utilities build awareness and promote the advantages of the smart grid to their customers. The product and services companies make the enabling technology, and counsel how best to design systems and solutions. Government agencies and regulators make laws, regulations, and set policies that define some of the economic and technical aspects of the grid. Also within the grid, a new type of player has emerged, intermediaries between supply and load. These intermediaries provide value added services for either utilities and/or customers. Institutions (e.g. universities, research entities) play a role in the ecosystem by influencing decision making on key elements such as R&D, funding, and infrastructure.

Demand response

Automated Demand Response (Auto-DR) is a new form of interruptible load for Demand-Side Management (DSM) programs. DSM includes any means of managing the dynamics of customer consumption of electricity in response to supply conditions. Traditional methods of DSM are pre-scheduled or available on-call, and are used primarily during times of peak-demand as a way to avoid the need to build new generators and power lines. Auto-DR takes this concept to the next level, providing the opportunity to balance the grid with a much quicker response time, which also improves reliability.

The Federal Energy Regulatory Commission (FERC) assessed the magnitude of the entire DR opportunity as the ability to curtail up to 188 GW of power by 2019, or about 20% of the country's overall peak energy use, by turning down power in commercial, industrial, and residential loads. ¹ This is a very attractive alternative to building the equivalent in new electrical generation capacity. At the U.S. average price of electricity, ~9.9 c/KWh, and the average marginal emission rate of 0.959 metric tons CO2e/MWh, utilization of 30 minutes per day would result in emissions reduction of 33 million metric tons of CO2e, and $3.4B per year² worth of energy generation capacity savings alone.³

Many governing authorities allow DR, or more generally DSM programs, to qualify towards meeting Renewable Portfolio Standard (RPS) targets. RPSs are regulations that require a certain level, typically 20-30%, of energy produced in a particular region to come from renewable energy sources, such as wind, solar, biomass, and geothermal. After a thorough debate of the economics, FERC ruled in 2011 that DR be compensated at the same local price of energy traded in the wholesale market, explaining that avoiding energy use through DR services is economically equivalent to producing and delivering energy, the same way going short and going long are equivalent in the stock market.⁴ However, as the Western Governors Association (WGA) noted in 2012, there are local challenges to implementation, including the fact that the Western Electricity Coordinating Council's (WECC) reliabilityrules do not currently allow for DR to provide the quick balancing response services called regulation or spinning reserves.⁵

This is one of many ecosystem cases where regulators are still working to converge on market rules that create incentives for market growth. To help reach this goal, continued funding of research and technology solutions by government agencies and other ecosystem players is critical to support long-term smart grid policy making. In addition, ecosystem players - including product and service companies, utilities and DR aggregators - play a key role in developing smart grid customer confidence, which should ultimately speed adoption. To unleash the full potential of this next-generation DSM - DR opportunity, ecosystem players need to reach a triple point convergence of engineering, business, and policy through collaborative ecosystem strategies.

Conclusion

The ecosystem dynamics of Automated Demand Response (Auto-DR) points to the need for effective ecosystem strategies, regardless of the specific smart grid element to be addressed. The need applies to all aspects of the emerging smart grid, such as application and integration of microgrids, home energy management, grid storage, etc. Ecosystem players that recognize the roles in the ecosystem and account for these relationships in developing effective smart grid ecosystem strategies should be best positioned to emerge as market leaders, all while helping speed the development and adoption of the smart grid.

¹ Freeman, Sullivan. Brattle Group. “FERC National Assessment of Demand Response Potential Staff Report”. Ferc.gov. June 2009. http://www.ferc.gov/legal/staff-reports/06-09-demand-response.pdf
² Hankey, Ronald. “Electric Power Monthly”. EIA.gov. Dec 2012. http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_3
³ “Electricity Emission Factors”. EIA.gov. Dec 2012. http://www.eia.gov/oiaf/1605/emission_factors.html#domestic
⁴ Hunger, David. “Demand Response Compensation in Organized Wholesale Energy Markets”. Ferc.gov. March 15, 2011. http://www.ferc.gov/EventCalendar/Files/20110315105757-RM10-17-000.pdf
⁵ Schwartz, Lisa. “WGA report – Meeting Renewable Energy Targets”. Western Governors.

Contact

Allan Miller
Director
(213) 356-6520 - (408) 817-5190
allan.g.miller@us.pwc.com

Subhendu Mahapatra
Manager
(203) 539-3487
subhendu.mahapatra@us.pwc.com

©2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership.
All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Driving forward with green manufacturing

The automotive industry is considering various ways to reduce operational costs while also mitigating its carbon, water, and energy footprint. The industry is already doing quite a bit of innovation to "green" the vehicle itself, which may entail the use of alternative propulsion technology to lower emissions or lightweight composites to improve fuel economy. However, OEMs and suppliers are beginning to realize that being environmentally conscious also means being financially savvy, which has spurred a shift towards leaner, greener manufacturing.

To illustrate this trend, we look at how three automotive manufacturers have made different types of plant-level investments to green their manufacturing processes and operations. As you will see, advances in various types of renewable energy as well as other clean technologies have given the industry plenty of options to transform their facilities, streamline their operations to reduce costs, and even turn green into an incremental revenue source.

Ford Motor Company: A living roof and innovative cooling

Ford is spending $2 billion¹ to transform its River Rouge manufacturing complex, including the Dearborn Truck Assembly Plant, into a symbol of environmental responsibility. Part of its investment has been used to create the world's largest living roof, which absorbs up to 4 million gallons of stormwater each year².

The roof was built out of necessity and was a wise financial decision for Ford. Runoff from the company's factory and parking lots, which includes oil, grease and chemicals, was polluting the nearby Rouge River and causing harm to its aquatic life³. Forced with having to abide by Environmental Protection Agency standards, Ford could either build a green roof for about $18 million or spend approximately $50 million to build a conventional water management system.⁴ In addition to reducing stormwater runoff, Ford's green roof provides insulating qualities that decrease energy use for heating and cooling, reducing energy costs at the factory by 7 percent per year⁵.

At its Lima Engine Plant, Ford has taken a different approach to being "green." The Ohio plant is using an innovative geothermal project to chill the plant's air. The system uses water from two limestone quarries located on the plant grounds, leading to the elimination of 4,300 metric tons of CO2 annually. The system cost $300,000 less to install than a traditional cooling tower and is expected to save millions of gallons of waters annually as well as reduce operating costs by about $300,000 each year⁶. It's another sustainable manufacturing project that makes sense from an environmental and economic standpoint.

Ford is employing many more strategies for achieving manufacturing sustainability at other plants, but let's look at what some other companies are doing.

General Motors Company: Reducing waste and using landfill gas

General Motors (GM) is taking a different route to being "green", with a focus on waste reduction. A recent press release from the OEM indicates its intentions on making 125 facilities adhere to a zero waste mandate by 2020, meaning "all production waste generated is reused, recycled, or used to create energy".⁷

When GM began its landfill-free program in the US, it invested about $10 for every ton of waste reduced.⁸ Over time, it has reduced program costs by 92 percent and total waste by 62 percent. ⁹ Today, the company recycles 90 percent of its worldwide manufacturing waste and has over 100 landfill-free facilities worldwide.¹⁰ Perhaps just as interesting, all by-products are regarded as useful and marketable; as such, GM counts about $1 billion in revenue annually from by-product recycling and reuse.¹¹

GM is also the second largest industrial user of landfill gas¹², a clean-burning fuel created from the incineration of refuse that would otherwise be idle and wasted. GM's Orion assembly plant saved $1.1 million annually in energy costs from powering 40 percent of the production of the 2012 Chevrolet Sonic and Buick Verano with landfill gas.¹³

In addition to its use of landfill gas, GM was named the top automotive user of solar energy in the US. In 2011, GM committed to doubling its global solar output to 60 megawatts in the next three years, and to increase renewable energy use to 125MW by 2020¹⁴. As of 2012, the company had solar arrays on a variety of plants, distribution centers, and EV charging canopies; in total, they generated enough power for 800 homes, a number that is expected to double in 2013.¹⁵

Volkswagen: Achieving Platinum LEED certification

Volkswagen (VW) has also demonstrated its commitment to green manufacturing, but has done so in a different way. VW's recently opened Chattanooga plant achieved an esteemed honour by obtaining platinum certification from the U.S. Green Building Council's Leadership in Energy and Environmental Design (LEED).¹⁶ The Chattanooga plant is the only automotive manufacturing plant globally to achieve platinum certification through a combination of energy efficient equipment and machinery, storm water collection and reuse, and renewable power generation through a local hydroelectric dam.¹⁷ For example, its sustainably designed paint shop saves more than 50 million gallons of water each year, while a combination of low-flow water closets and urinals as well as a rainwater harvesting system save 1.7 million gallons of potable water each year. ¹⁸ In addition, superior insulation, including a white, reflective roof, results in 720,000 Kilowatts per year in energy savings, while the use of LED lighting on the exterior of the plant results in 68% less energy used.

Conclusion

The initiatives undertaken by Ford, GM and Volkswagen are demonstrative of the benefits of meeting higher ecological standards in manufacturing. The positive impact of their actions reaches beyond simply obtaining "green" status. They have identified various clean technologies and strategies that help streamline their operations, minimize their impact on the environment, and ultimately, increase profitability.

While the depth and variety of these manufacturers' investments are indicative of the automotive industry's movement towards greater use of renewable energy sources and "greening" manufacturing processes, there is still a tremendous amount of untapped potential, both for the industry, and for the nation as a whole. To realize this potential, companies need to take a holistic approach to updating their facilities and define a comprehensive sustainability strategy that is scalable, replicable, and economically viable. Simply "greenwashing" a facility is not sustainable; the automotive industry needs to focus on the environmental impact of its decisions as well as the operational and economic impact of its investments in clean technologies.

¹Ford Corporate," Ford's Rouge Complex is known as an industrial trend-setter in both the 20th and 21st centuries." Historic Sites http://corporate.ford.com/our-company/heritage/historic-sites-news-detail/665-rouge
²Ford Media, "Ford Installs Word's Largest Living Roof on New Truck Plant." http://media.ford.com/article_display.cfm?article_id=15555
³Healing Our Waters-Great Lakes Coalition, "Ford Motor Co.'s Green Roof: Saving Money While Protecting the Environment." Healthy Lakes: Healing our Waters, http://healthylakes.org/successes/restoration-success-stories/detroit-embraces-great-lakes-restoration/ford-motor-co-%E2%80%99s-green-roof-saving-money-while-protecting-the-environment/
⁴ Ibid.
⁵ Ibid.
^{6Ford Corporate, "Renewable Energy." Sustainability 2011/12, http://corporate.ford.com/microsites/sustainability-report-2011-12/environment-operations-emissions-energy}
7 GM Media, "GM Makes the Business Case for Zero Waste." News, http://media.gm.com/media/us/en/ gm/news.detail.html /content/Pages/news/us/en/2012/Oct/1019_Landfill-FreeBlueprint.html
⁸ Ibid 7.
⁹ Ibid 7.
¹⁰ Ibid 7.
¹¹ Ibid 7.
¹² Ibid 7.
¹³ Ibid 7.
¹⁴ GM Media, "GM Named Top Solar User in U.S. Auto Sector." News. http://media.gm.com/media/us /en/gm/ news. detail.html/ content/Pages/news/us/en/2012/Sep/0912_solarArray.html
¹⁵ Ibid 14.
¹⁶ Volkswagen Media, "Volkswagen Chattanooga Earns LEEDS Platinum." VWoA Top Stories, http://media.vw.com/newsrelease .do;jsessionid=AB34AC89AB9299E812231045F72543BC?&id=967&allImage=1&teaser=volkswagen-chattanooga-earns-leed-platinum
¹⁷ Ibid 16.
¹⁵ Ibid 16.

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Debi Gerstel 
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Douglas Gilman 
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Terese-An Nguyen 
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©2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership.
All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Cleantech in China: The road to increasing electric vehicle adoption

China has held the title of world’s largest auto market since 2009, when it surpassed the U.S. with a then-record 13.6 million automobiles sold.¹ Projections for 2012 indicate modest growth over 2011 to approximately 16 million passenger vehicles sold in China, but the return of high growth is anticipated and Chinese consumers are expected to buy 25.5 million vehicles a year by 2015.² However, the rapid development of the passenger car market and the speedy rise of the automobile culture have contributed to issues such as air pollution and significant roadway congestion in major cities.³

According to the China Greentech Initiative (CGTI), of which PwC is a Game Changer Partner, new energy vehicles, such as battery electric vehicles, plug-in hybrid electric vehicles, and natural gas vehicles, are now a priority for the Chinese government due to their ability to improve energy and resource efficiency while also reducing emissions and minimizing the environmental impact of transportation.⁴

As a part of broad, national goals to reduce carbon emissions and decrease reliance on fossil fuels, the Chinese government has enacted several policy initiatives to drive growth in the clean transportation sector. In addition to a New Energy Vehicle Industry Development Plan, new energy vehicles were named one of the seven Strategic Emerging Industries (SEIs) in the 12th Five-Year Plan, resulting in significant regulatory and financial support across the sector.⁵

But the new energy vehicle industry is still in the early stages of development, facing the initial challenges that most nascent sectors encounter. As such, developing a full-fledged clean transportation sector in China will likely be a long journey that requires a combination of policy initiatives, technological advances, and consumer education, but one with ample opportunities for foreign companies to play an important role.

National focus on electric vehicles

The push for electric vehicles in China is driven by a number of national policies that are intended to result in electric vehicles playing a major role in the country’s automotive industry by 2020. Although conventional vehicles with internal combustion engines still dominate China’s roads, by placing a strong emphasis on improving the available technology and encouraging widespread adoption of electric vehicles, the Chinese government hopes to lessen reliance on imported oil, dramatically reduce pollution, and make significant cuts to energy consumption.⁶

China’s State Council published its detailed development plan for new energy vehicles in June 2012, outlining comprehensive objectives for the automotive supply chain related to electric vehicles, including batteries, electric motors, automotive electronics and advanced transmissions.⁷ The plan also calls for the accelerated and coordinated development of related infrastructure, such as a network of charging stations and a smart grid system while also addressing the need for national standards for the vehicle charging interface at charging stations. In addition, a series of additional steps to create a comprehensive consumer-facing electric vehicle market are outlined, including models for leasing, consumer financing, insurance, after sales service and battery recycling programs.⁸ China’s Ministry of Science and Technology (MOST) has also provided a comprehensive electric vehicle technology roadmap that takes a phased approach to commercializing and deploying battery electric vehicles on a wide scale by 2015.⁹

Ambitious development and adoption goals

For years, electric vehicles have been viewed as a way for domestic Chinese automakers to match, or even leapfrog foreign competitors by rapidly bringing automobiles with large-capacity batteries to market on a major scale. However, despite a high level of enthusiasm, only 15,000 electric vehicles had been sold in China by the end of 2011, making the ambitious targets set for 2015 (cumulative 500,000 electric vehicles sold) and 2020 (cumulative 5 million electric vehicles sold) challenging to achieve.¹⁰

While the government has made some progress in the electrification of public vehicles (e.g., metropolitan buses), private consumer adoption of electric vehicles has been limited. According to interviews conducted by CGTI, low availability of electric vehicles, limited charging infrastructure and high costs are the primary reasons few consumers have chosen electric vehicles.¹¹ In response, both national and local governments have implemented a series of monetary and administrative incentives, including subsidies of up to $9,500, cuts in sales tax on qualifying vehicles, and exemptions from license plate lotteries in cities where it may typically be costly or difficult to obtain registration.¹²

At the same time, installation of charging posts has lagged far behind government targets (with 13,283 posts installed at 2011 year-end) and significant acceleration of charging infrastructure deployment will likely be required to achieve the national target of 400,000 installed posts by 2015.¹³ But a number of challenges, from limited space in major cities and high up-front install costs to long charging times and potential to overload existing grids, will need to be resolved.

Staying on course

Some industry analysts have indicated that China’s auto industry ecosystem is not yet ready to support the mass production of battery electric vehicles and should instead adopt plug-in hybrid electric vehicles as a bridging technology to ease the transition to battery electric vehicles.¹⁴ As such, it’s not surprising that the Ministry of Industry and Information Technology (MIIT) has placed greater policy emphasis on the development of plug-in hybrid electric vehicles in the near future.¹⁵

But promising electric vehicle pilot programs in cities such as Shenzhen and Hangzhou demonstrate that electric vehicles will likely continue to have significant potential. Shenzhen ranks first in China for private electric vehicle sales due to effective implementation of an incentive program and available charging infrastructure, while Hangzhou is demonstrating progress in developing innovative business models and promoting local electric vehicle original equipment manufacturers (OEMs).¹⁶

CGTI has identified the following opportunity areas based on sector trends and developments in 2012 that will likely be vital to continuing to push the electric vehicle sector forward.¹⁷

The Chinese government has made a strong commitment to the successful development of the electric vehicle sector. Instead of relying solely on purchase subsidies, officials have taken a comprehensive view of the electric vehicle industry and introduced multi-faceted policies that address the sector as a whole, including product research and development, related component supply chains and operational infrastructure. These policies should encourage industry collaboration to drive development that, when paired with sufficient consumer demand, will help China transform into an electric vehicle leader and realize the environmental benefits of new energy vehicles.

¹ Guillaume, Gilles. "China Car Sales Top U.S". Reuters. Accessed Feb 12, 2013. http://www.reuters.com/article/2010/01/11/us-autos-idUSTRE60A1BQ20100111.
² Ibid.
³ Mao, Sabrina. "Now Beijing Plans Congestion Fees to Ease Traffic". Reuters. Accessed Feb 12, 2013. http://www.reuters.com/article/2011/09/02/us-china-traffic-beijing-idUSTRE78119I20110902.
⁴ "The China Greentech Report 2012". China Greentech Initiative (April 2012): pg. 16.
⁵ Ibid.
⁶ Ibid, pg. 128.
⁷ “China publishes plan to boost fuel-efficient and new energy vehicles and domestic auto industry; targeting 500K PHEVs and EVs in 2015, rising to 2M by 2020”. Green Car Congress. Accessed Feb 12, 2013. http://www.greencarcongress.com/2012/07/china-20120709.html.
⁸ Ibid.
⁹ “CGTI Cleaner Transportation Opportunity Assessment #2”. China Greentech Initiative (June 2012): pg. 10.
¹⁰ “CGTI Cleaner Transportation Opportunity Assessment #2”. China Greentech Initiative (June 2012): pg. 11.
¹¹ “The China Greentech Report 2012”. China Greentech Initiative (April 2012): pg. 141.
¹² “CGTI 2012 Cleaner Transportation Sector Snapshot”. China Greentech Initiative (2012): pg. 12.
¹³ Ibid, pg. 14.
¹⁴ “World Bank/PRTM study finds global value chain shift resulting from vehicle electrification could favor China from technology and supply chain perspectives”. Green Car Congress. Accessed Feb 15, 2013. http://www.greencarcongress.com/2011/04/chinaev-20110420.html
¹⁵ “CGTI Cleaner Transportation Opportunity Assessment #2". China Greentech Initiative (June 2012): pg. 10.
¹⁶ Ibid, pg. 33.
¹⁷ “CGTI 2012 Cleaner Transportation Sector Snapshot". China Greentech Initiative (2012): pg. 28.

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Alan Chu 
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(213) 356-6520
alan.chu@us.pwc.com

Justin Chan 
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©2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership.
All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.