September 24, 2012 - From the October, 2012 issue

Cleantech Investor Tom Rand on Parallels of California and Canada's Clean Tech Markets & Government Initiatives

Tom Rand is a well-known investor and entrepreneur and is the Cleantech Practice, Lead Advisor at the MaRS Discovery District in Toronto, Canada. Ahead of an LAEDC trade mission to Toronto, TPR asks Rand how markets are beginning to reflect the realities of climate change and what parallels exist between cleantech investment in California and Canada. Rand notes that as the pressures of climate change emerge, industries across all sectors, from mining to forestry to manufacture, will have to plan carefully to reduce carbon emissions as part of staying flexible with a changing economy.<See: http://vxcanada.ca/>


Tom Rand

"The internet underpins the entire economy now, to a greater or lesser extent in all sectors. Similarly, I think, in the years to come, energy use and our response to the need to go to low carbon will underpin all sectors." -Tom Rand

A Los Angeles Economic Development Corporation Trade and Investment Mission arrives in Toronto, Canada in October to explore trade opportunities in energy and clean technology. What business opportunities await them?

Tom Rand: I think certainly it varies province by province, but in Ontario there is an emerging smart grid sector—energy management and storage as well as clean energy production. One of the benefits that trade mission will have, particularly when it comes to early-stage innovative companies, is a single point of contact, which would be the MaRS Discovery District. We’re also looking forward to delivering second-generation bio fuels technologies into the market, for example, and I think there’s lots of ways where both venture and project finance in California and Ontario can work very well together. 

You were a plenary speaker at the VerdeXchange Canada Conference in 2011, where you emphasized that our clean tech and carbon mitigation challenges lie not in technology, finance, or policy but rather in the public’s willingness to shape the market. Could you elaborate on your remarks and share what’s happened since 2011? 

Fundamental to a lot of modern North American thinking about markets, and certainly with the conservative crowd, is the idea that the market is free and natural—like a tree or a tiger or river—and we mess with it at our peril. The feeling holds that if you really want economic growth you leave the market alone. That presents a fundamental problem because we can’t deal with climate change without very strong intervention in the market. 

I think one of the most important things we can do is bust the myth of the free market.  There is no such thing as a free market—the market is more like an artifact, like an ipod, something we’ve engineered and designed. We invented credit default, IPOS, banks, contract law, and all that stuff. More specifically, most of the wealth that was generated in the 20thCentury—from Silicon Valley to aerospace to nuclear through to bio medicine, and so on—these all resulted from very strong and strategic partnerships with the government. Even the automotive sector was shaped by the government building the interstate highway system, never mind the recent bailouts.

We need to rethink our ideological commitment – certainly on the right - to free markets. But I think more practically, we need to be honest about where wealth generation has come from and acknowledge the role strategic government intervention has played.  

Speaking of savvy government interventions, share with our readers what the Provinces of Canada have enacted to advance clean technology innovation and job creation.

Several of our provinces have enacted my preferred solution, which is a price on carbon. BC has one, Alberta has one, and Quebec has one. These are tentative first steps, and it’s not a high price, but it’s an opening of the market. To me that’s the single most important thing we can do  if you value the power of markets and want a simple signal that changes all that activity at once.  A price on carbon is really the only way to do that.

Second best is where the government picks winners and losers and tries to shape the market in more blunt ways. Ontario’s Green Energy Act, I’m a full supporter of.  It’s got a feed-in tariff and is getting wind and solar onto the grid. It’s certainly a decent opening gambit, but it’s not a long-term, sustainable policy solution.

In my mind, there is nothing like a price on carbon. It’s the simplest, most effective, and most broad-reaching way we can shape the market. Nevertheless, the Green Energy Act is one of the most progressive pieces of legislation in North America. The challenge for Ontario is going to be, what next? How do we take this protected, domestic market for bio gas, wind, and solar and generate an export-oriented, globally competitive cluster around it? That’s really what the Ontario Clean Energy Task Force is thinking very hard about, and that’s what the newly announced Clean Energy Institute at MaRS is thinking hard about, as well. 

The Energy Institute at MaRS will be hosting the LAEDC trade mission. Help our readers appreciate what the objective is of MaRS Clean Tech.

At MaRS our primary objective is translating intellectual property into economic activity by taking high tech companies, helping them grow, and establishing global leaders.  In cleantech, which is one of our three practices, we view the entire ecosystem as being part of that purview – it’s all part of what we need to affect to fulfill our mandate. So the Clean Energy Institute is designed around engaging the big utilities, our distribution, our transmission, our generating companies, our regulators—like the Ontario Power Authority and the IESO, people that run and manage that grid—policy makers, as well as the big corporates like Siemens and GE, and so on. We ask those groups how we might catalyze innovation in Ontario. How do we take Ontario’s grid, which is sort of an old, creaky grid—like every other grid in North America—and view that as an asset to innovation, rather than a hurdle?

That’s a conversation that takes place at a higher level than innovators and entrepreneurs.  It takes place at utilities, with regulators, and so on, and that’s where the Clean Energy Institute will play. Our first target is the use of energy data—we have seven million smart meters in this province, and we haven’t really leveraged that advantage, so we’re going to tackle that head-on. 

The second is energy storage. We’re going to work to develop articulate value propositions for energy storage to be passed to the groups that look after the rate base, to say, “this is money well-spent, putting storage onto this grid.” If we can do that, if we can get multiple pieces of storage on that grid, we’ll learn to play with those new assets and will develop new engineering expertise. Again, ideally, it’ll be exportable expertise in that growing sector.

In your remarks to VerdeXchange Canada in 2011, you also said cleantech is no longer a sector but is the underpinning of a movement towards a globally sustainable economy. Break that down for us, like you did at the conference.

It’s just like the internet cannot be thought of as a distinct sector anymore: if you’re a mining company, in you’re in forestry, in you make jeans in China, it doesn’t matter what you do, you have to have a strategy around communications, data, the internet, and so on. The internet underpins the entire economy now, to a greater or lesser extent in all sectors. Similarly, I think, in the years to come, energy use and our response to the need to go to low carbon will underpin all sectors. It will guide mining, forestry, automotive, clothing—it will affect everything.

One of the key signs of this is when CFOs begin to look at energy costs on their income statement as being core to their business, in that they want to hedge the risk of rising prices and take seriously the notion of carbon risk. They’ll understand they need to invest capital into changing the way they produce and ship their goods and services in order to limit the amount of fossil fuel energy baked into their product. If you have a lot of carbon baked into your product, at some point that product is going to be less competitive in the market because the carbon risk will be priced. Sooner or later it’s going to be priced, and I think that’s why it sort of underpins all sectors. All sectors use energy; all sectors manage energy. Cleantech will underpin all sectors as we mitigate this energy use.

What economic synergies exist between California and Ontario? What venture opportunities do you see as ripe in 2012?

I work in venture capital and in bringing technology to market. Clearly, California has a very long history of bringing technology to market. Silicon Valley has been thinking about cleantech but has gotten a little gun-shy lately. I think now they’re putting their toes back in the water.

Our first task is to build relationships between the different groups funding technology. We have the MaRS Cleantech Fund, which is a $30 million early stage, privately-backed venture fund. We look for partners in Silicon Valley when we make our investments, so at the grassroots level of the venture side.

Looking forward, California has always been at the forefront of regulatory change.  You’ve got some regulatory moves in place to get storage onto your grid; you’ve got building re-commissioning happening every five years to look at how you better rebuild your infrastructure in cities. Those are both areas that Ontario is playing in. Both jurisdictions are working to build bridges between the translation of technology production into market pull for energy infrastructure and building infrastructure. If we work together, of course, we’ll figure out how to export this stuff to the rest of the world together.  

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And with respect to research, do you see strategic relationships growing out of the MaRS Cleantech Institute and Southern California academic  & research Institutions that could be collaborative and leveraged? <VX2012 Models for Commercialization of Technology>

Yes, of course, I think there can always be better collaboration between researchers, in particular better collaboration between those looking at translating basic research into economic activity.  Ontario and California both have world-class academic institutions. I think the interesting piece is to ask how we generate economic activity from that basic research. That’s something that California has been doing for a while, certainly on the IT side. In Ontario we’re building those bridges now, at the Clean Energy Institute, MaRS, and so on. We’re looking into academic institutes for next-generation technology and helping pull that intellectual property into the market. Though both Ontario and California have a long history of best practices in that area, this doesn’t mean it can’t be improved through collaboration.

Given that Silicon Valley remains the regional model for technological innovation, what is  the genius of Toronto’s MaRS campus? <VX2012 L.A. Panel on Incubation>

As someone put it to me one day, much more succinctly than I ever could, MaRS is trying to put Silicon Valley in a building—the kind of interconnectivity between entrepreneurs, scientists, financiers, bankers, and venture capitalists. It’s where a supporting infrastructure gets built for the best of the best. If you rise to the top with your IP, your idea, and your company, you should be embraced by a large swath of corporate executives and people with networks and with capital. 

That’s what happens in Silicon Valley. That’s the brilliance of Silicon Valley—it allows the real creativity of the entrepreneur to flower and take root. That’s what we’re trying to do at MaRS, and we certainly look at what has happened in California as a shining example. We’re trying to create that in Toronto and, ideally, partner with Silicon Valley.  We don’t see it as a competitive environment—we think there are trillions and trillions of dollars of clean energy infrastructure to be built around the world, and people who partner to get there first are going to be very well placed.

Please elaborate Tom, because attempts to recreate Silicon Valley are being tried in every region in the world and every major city. What are the special ingredients that come together in Toronto that give you confidence that MaRS will also be a magnet for innovation? 

Historically there’s been one thing on the federal scene that’s been very helpful in Canada, a fund called Sustainable Development Technology Canada. It’s a billion-dollar fund that helps provide project finance for early-stage, cleantech technologies, leverages private sector partners and so on. That laid the foundations for the last eight to ten years in Canada for a fairly robust early-stage, cleantech industry.

Canadian cleantech is eight to nine billion a year right now, the fastest growing sector in Canada. It’s dominated by small and medium-sized enterprises and spends more on R and D as a sector than the entire oil and gas industry. So this has been seeded for a while, and there’s a healthy foundation.

We’ve now put in place the Green Energy Act and the Economy Act in Ontario. We’ve got MaRS, which is a very strong partner when it comes to pulling IP into the market and finding finance for it. We’ve now got the Clean Energy Institute, the Mars Cleantech Fund, so the cluster we’re building at MaRS sits on top of some history. It hasn’t come out of nowhere. But it’s certainly putting some turbo rockets onto the cleantech economy here in Canada.

California and Ontario, as you suggest, have been actively advancing smart government interventions to create that marketplace for clean technology and sustainability. California, for example, is now implementing a cap-and-trade program and an auction system; it also is interested in British Columbia and Quebec’s carbon pricing policies. If you were an advisor to the California government on what market strategies they should advance, what would you recommend? <http://verdexchange.org/>

In my mind, the auction system and cap-and-trade can be effective for lots of large, single-point sources of emissions, but it can also be gamed. I think one of the challenges of cap-and-trade is how you get buy-in from industry. Typically there are so many loopholes built in that you really don’t get effective energy management for many, many years to come. I think a price on carbon is much simpler, and, in my view, more politically palatable to the electorate.

The carbon tax can be revenue neutral. You have to sell this to the public, but if you raise a billion dollars by taxing carbon you distribute that money immediately to the general public and have them decide how to spend that money. If you want to live a high-carbon lifestyle you’ll be poorer. If you want to live a low-carbon lifestyle you’ll be wealthier. You allow individual choice to affect that market.

The market is so complex that imposing well-defined external constraints on it—feed-in tariffs, cap-and-trade—I think can be effective but will be more blunt than a single price on carbon, which allows the creativity of the market to evolve through millions of individual decisions. So I would say to California, “You might want to do a tax and dividend, where you raise money from pricing carbon but distribute it directly to the public.” It’s politically palatable and extremely affective.

What, in your experience, is acting as a drag, both in Ontario and California, on the rich entrepreneurial and research opportunities you cite?

Globally we’ve yet to have an adult conversation about what climate change really means.  You’re in the middle of one of the biggest droughts in modern memory, in the United States.  And it’s nothing but an appetizer. Once we have a drought in two or three countries at a time and our international grain markets dry up, which they will do, then we’ll get serious about it.

But until we have that adult conversation about the very real dangers we face, it’s very difficult to talk about the pace of change. It’s hard to talk about raising the cost of fossil fuels with taxes because it’s politically unpalatable. We need leadership at the federal, state, and municipal levels, including both business and political leaders. We need business leaders in particular talking about what’s coming and about hedging our bets and mitigating this problem.

In Canada at the federal level, we don’t seem to be able to have that conversation. At the provincial level we dabble, but it’s always couched in economic growth. Certainly there is economic growth that’s made possible through a low-carbon economy, but I don’t think you want to pull any punches. I think you want to speak openly and honesty about the kind of economic insecurity and food insecurity that not responding to climate change will bring. That’s a very difficult conversation to have, but I think that’s what true leadership calls for: those difficult conversations with the public.

To conclude our interview, please share with our readers your background and what inspires your investment of time and resources in cleantech?

I’m really just a gadfly, but I’ve been a serial entrepreneur all my life. I was a software entrepreneur and sold that company in 2005. Being an over-educated observer of all things carbon-related, I got into the cleantech game full time at that point as an investor. I sit on the board of four or five cleantech companies and a couple of environmental NGO’s, and I came to MaRS Discover District essentially to join an institution that I thought had the capacity to bring real change into the market. I wrote a book called Kick the Fossil Fuel Habit: 10 Clean Technologies to Save Our World to try to directly engage the public. My second book Hot Water is out next spring.

MaRS founded the cleantech practice in 2009. I’m now a Managing Partner of the MaRS Cleantech Fund. But I’m really just an engineer, a philosopher, and someone very alarmed at our increasing carbon levels. It scares me, to be blunt. I’m alarmed at what I see, and I’m alarmed that I don’t see a lot of my peers in the business community speaking openly about what’s coming. I think they do that out of a kind of honest reticence. If you work for a big institution, the last thing you want to do is to start waving flags of alarm everywhere. But I think the time has come to do just that.

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