One of the most active cleantech investors, Vinod Khosla, made an interesting statement last Fall quoted in the San Francisco Chronicle: “Anything that requires people to change their habits has a low probability of success.” A pretty cynical, discouraging view when you think about our energy needs, priorities and what has to change.
Now, think about whether elasticity of demand related to energy prices affects buying behavior beyond reducing energy consumption directly. For example, in addition to reducing the number of miles people drove, higher gas prices rapidly tipped buying behavior toward higher mileage cars. A secondary effect, or cross elasticity. If so, does that contradict Khosla’s view? The director of the Stanford’s Precourt Institute for Energy Efficiency noted in Stanford Business, November 2008, that “The oil market has only small elasticity of demand.” Their research shows that a 10% increase in oil price lowers demand by just 1%. A small reaction to a large change in price makes it a little hard to believe that fundamental buying habits are going to be affected.
When gasoline hit $4.00 a gallon, we saw demand for gas guzzling SUVs drop off precipitously in favor of smaller, more fuel efficient cars. Why, if elasticity is so low (inelastic)? Soaring gasoline prices produced a visceral reaction – sticker shock – at fill-up time. That immediate behavioral change points up the difference between short-term and long-term elasticity. So, my conjecture is that – in the SUV case – behavior tracked a short-term effect that was much more elastic than cited by the Precourt Institute. Now that gasoline and other energy prices tied to oil have dropped, people don’t seem to care as much about efficiency. While oil prices may continue to creep upward, most don’t expect the volatility that recently got us north of $4.00 a gallon gas.
If energy prices move up slowly, the 0.10 elasticity number – long-term inelasticity – seems more reasonable. Vinod Khosla’s assertion about changing habits may be correct if people resist those changes when the forces are so incremental, even insidious, that they don’t cause sticker shock. The fall-off in SUV sales that came from a fast, large almost discontinuous shift in the game is, perhaps, the exception that proves the rule.
How will we as a nation help achieve Obama’s goal to embrace renewable energy alternatives if we don’t experience energy price movements big enough to affect our habits in ways that produce strong reactions that counter Khosla’s view?
The founder of an energy firm told me that “Marketing guys will be the last to get hired in this economy.” (Many would take his belief further: marketing should be the first thing being cut in the downturn.) I argued in a previous blog post that tough economic times may be the best time to use marketing to prime the pump. Maybe marketing is at least part of the answer to two issues: how we change habits and ensure those changes have positive outcomes.
It takes real effort to drive adoption of new ideas and approaches in any sector. In my previous life in the enterprise software world, I rarely saw vendors implement well designed “change management” programs – typically requires a large marketing component inside the user organization – alongside their technical implementations. As a result, there were more failures of information technology initiatives due to organizational and cultural resistance than to technical problems. Renewable energy faces the same risks. Just as in software firms, technical considerations dominate and marketing lags well behind.
If we want renewable energy initiatives to take hold broadly, marketing needs to become a key weapon in the fight – right now. Otherwise, Khosla’s “rule” will be proven correct and the goals of renewable energy and cleantech are less likely to succeed.
At a presentation yesterday, Ed White from National Grid, an international energy transmission and distribution company, talked about the photovoltaic project they’re building alongside a gaudily painted natural gas tank that everyone in Boston knows well. He took great pains to point out that commuters will be able to see the fields of PV arrays while they’re driving (likely stuck in traffic). That’s a marketing message. And it’s critical to the future of renewable energy.
– Posted by Tom Witkin