Green Technology Future

1. Executive Agenda
The Profitable Shift
to Green Energy
Global consumer goods companies following today’s
energy trends are finding that greening their energy
supplies with renewable energy initiatives is good—
not only for the world but also for their profits.

2. 2The Profitable Shift to Green Energy
Executive Agenda
Before his death last year, Ray Anderson was anointed by The New York Times as America’s
greenest businessman. When Anderson, CEO of the Atlanta-based global carpet firm Interface,
first decided to move manufacturing and operations toward full sustainability in the mid-1990s,
he had trouble convincing his colleagues that such a move was in the company’s best interest.
Barely a decade later, however, it was clear that Anderson was ahead of his time. By 2005,
Interface was saving $400 million a year by reducing waste, decreasing absolute greenhouse
gas emissions by 92 percent, cutting water use by 75 percent, and sending fewer materials to
landfills. Profits doubled in the same time period. Anderson clearly understood the impact a
green strategy could have on the bottom line.
Today, retailers and consumer packaged goods (CPG) companies are following in Interface’s
footsteps, strategically making their operations more environmentally sustainable. Wal-Mart,
IKEA, Tesco, and Target have set sustainability goals at varying degrees and are pursuing ways
to meet them (see figure 1). Major producers and suppliers have followed suit. Nestlé, Procter
& Gamble, Coca-Cola, PepsiCo, Kraft, Johnson & Johnson, and Unilever have all made public
commitments and are developing energy programs to achieve their green goals.
Although corporate motives for going green are often similar, the approaches can be quite
different. For example, Tesco is primarily carbon-focused and deals primarily with managing,
reducing, and offsetting carbon or greenhouse gas (GHG) emissions. The company, the world’s
third-largest retailer, has pledged to halve emissions by 2020. Other companies are focusing on
Note: FMCG is fast-moving consumer goods.
Sources: Company reports and websites; A.T. Kearney analysis
Figure 1
Sustainability goals of consumer goods companies and retailers
Levelofambition
Year of announcement
2006 2007
LowHighMedium
2008 2009 2010 2011
FMCG companies
Retailers
Size of circle = relative revenue 2010
Henkel
Kroger
Target
IKEA
Unilever
PepsiCo
Best Buy
Coca-Cola
Wal-Mart
Nestlé
Tesco P&G
Kraft
J&JReckitt Benckiser

3. 3The Profitable Shift to Green Energy
Executive Agenda
water, reducing freshwater use, or landfill diversion, such as Coca-Cola’s water-stewardship
and sustainable-packaging initiatives. Some go even further: Nike, for example, launched
responsibility programs that address its social and economic impact on the communities
in which it operates.
Green energy is at the heart of all ecological strategies because it affects companies in three
vital areas: environmental, economic, and social (see figure 2).
Environmentally, a company’s core activities will determine the size of its energy footprint, but
reducing greenhouse gas emissions, which have a sizable environmental impact, is an essential
element for any sustainability pledge.
Economically, conserving energy can have a huge impact and mitigates risk around fossil fuel
costs. After a company has picked the low-hanging fruit—the well-known, no-cost energy-
conservation measures—the question becomes how to further reduce energy consumption,
especially in an environment of volatile commodity prices and supply. Green energy practices
can also improve revenues, thanks to many of today’s shoppers who are especially loyal to
environment-friendly brands. The United Kingdom’s Carbon Trust initiative, for example, has
prompted companies such as Walkers Crisps, Levi Strauss, and PepsiCo to add a carbon
reduction label to packaging that states the amount of GHG emissions associated with
manufacturing and distributing.
On the social front, the sustainability argument focuses on community impacts, such as how
open-pit mining or hydroelectric dam construction can affect life in a small town or how energy
projects can create jobs.
With this trifecta of factors in mind, many firms recognize the value of going green and want
to build renewable-energy initiatives into their corporate goals without negatively affecting
Source: A.T. Kearney analysis
Figure 2
Green energy is at the heart of corporate sustainability strategies
Economic
Environmental Social
Green
energy

4. 4The Profitable Shift to Green Energy
Executive Agenda
the bottom line. Yet, going green can positively affect a company’s bottom line through energy
efficiency and financially feasible renewable projects.
Saving Energy: The Greenest and Usually the Most
Profitable Strategy
Becoming more energy efficient is the first step toward reaching sustainability goals. Energy
efficiency projects can vary in terms of capital investment and complexity, ranging from simple
changes in lighting policies or production processes to investing in more efficient heating
systems. Most initiatives yield attractive returns and relatively short payback periods. For example,
AT&T is saving $86 million a year in energy costs from roughly 8,700 energy projects launched
within the past two years, and Tesco estimates that energy efficiency projects dating back to 2006
are now saving the company $320 million a year.
Energy-efficiency measures also help achieve sustainability goals that are expressed as a
percentage of overall consumption. If total energy consumption is reduced, less renewable
energy is needed to reach those targets. Thus, assessing current energy consumption and
right-sizing potential is directly related to the type of renewable-energy technology that best
suits a company’s needs.
In addition, putting a spotlight on ways to improve energy efficiency can reveal unexpected
new ways to improve standard operations (see sidebar: Going Green Can Trigger Innovation).
However, energy efficiency is rarely the silver bullet for achieving ambitious sustainability goals.
And it’s not a matter of choosing energy efficiency over renewable energy or vice versa—rather,
it’s combining both to the best possible effect. The multitude of initiatives and strategies it takes
to realize this ideal combination can be daunting. The market has recognized this dilemma,
and various energy-efficiency and renewable-energy offerings now minimize risk exposure and
require minimal internal resources. Essentially, they allow locking in a price for an agreed-upon
Going Green Can Trigger Innovation
Focusing on improving energy
efficiency or investigating alter-
native energy sources often
leads to new ways to improve
standard operations—ideas
that might otherwise have gone
unnoticed. For example, measur-
ing individual electrical circuits
in an office building revealed that
a certain type of server used
the most electricity.
The U.S. Department of Energy
says data centers use up to 200
times more energy than offices
and that most servers run at or
below 20 percent utilization.
Such wasted energy can be
mitigated with processor devices
and internal servers—especially
Energy Star, which are 30 percent
more efficient.
An investment in generating
renewable energy or a commit-
ment to a green supply contract
should always be preceded by a
demand analysis, where demand
is defined by consumption and
volume. For example, renewable-
energy equipment such as
biomass-fired combined heat
and power is most efficiently
operated in base-load, steady-
production mode. So users
will try to shave demand peaks
by analyzing required rates of
production ramp-ups or overall
run time of auxiliary equipment.
This should be discussed with
operations managers, and we find
that such discussions are best
conducted in a well-facilitated,
group-meeting format that
welcomes new ideas for win-win
solutions in energy production
and manufacturing processes.
The result is a motivated,
empowered corporate environ-
ment that creates bottom-up
innovations and solutions.

5. 5The Profitable Shift to Green Energy
Executive Agenda
period of time. Providers of these services usually guarantee certain savings and earn a
commission on every reduction target that is met, while taking on the risk for missed targets.
It is possible to blend usually profitable energy-efficiency projects with less attractive
renewable-energy investments—in essence, cross-subsidizing the latter with the former.
Although it is essential to define an all-inclusive strategy that combines both types of initia-
tives, renewable-energy projects can be structured as standalones with no subsidies. While
sometimes cumbersome at first, such an approach generates higher value.
The Economics of Energy
Financial feasibility is often a challenge when implementing a renewable-energy project. After
all, such projects compete with other business investments and have to pass the same return-on-
investment tests. The economics of an energy project are determined by five parameters that can
differ widely depending on regional or even site-specific factors: energy prices, technological
effectiveness, incentives, capital expenditures (capex), and operations and maintenance.
Energy prices. Price defines both the cost of the energy that the project is intended to replace
and the key cost components for certain type of energy projects, such as biomass, an option
that faces its own inherent hurdles (see sidebar: The Biomass Challenge). Energy prices are
determined by regional generation portfolios, the price of competing fuels (particularly natural
The Biomass Challenge
The path toward green energy
consumption depends mostly
on a company’s requirements
for electrical versus thermal
energy. Electrical energy offers
the most flexibility because it
can be wheeled across the grid
and produced off site. Thermal
energy, steam, or heat need to
be generated on site or nearby—
they don’t travel well over long
distances. Purchasing green gas
or biogas to generate thermal
energy on site offers the same
flexibility as electricity if a strong
pipeline infrastructure exists.
However, this option has not
proved very cost-competitive
given current natural-gas prices
unless the biomass waste can
be used.
Theoretically, many organic
materials can be used as biomass
fuel, which is good because the
amount required for a medium-
size biomass boiler is signifi-
cant. A 10-megawatt biomass
cogeneration plant requires
240,000 tons of woody biomass
per year. Assuming 365 days
operation per year, 26 trucks
a day would be loaded with 25
tons of biomass. The biggest
challenge for using biomass as a
fuel is ensuring long-term supply
at a reasonable price. Companies
have had to close down biomass
boilers after several years of
successful operation because
of supply problems.
The availability of biomass as
a fuel can deplete over time for
several reasons:
• Competition increases as other
industries become willing to
pay more for biomass fuel.
• Supply sources dry up as
farmers switch to more eco-
nomical crops, thus reducing
the availability of the preferred
agricultural waste as a fuel, or
a food-processing plant closes
down, ending the availability
of their process waste.
• Incentive plan changes can
drive up the cost of biomass
fuel.
To reduce these biomass supply
risks, we recommend developing
working relationships with local
farmers, lumber companies, and
other industries that use wood.
It is also wise to invest in activi-
ties that will help ensure future
biomass supply—planting trees,
for example—and to limit the use
of biomass boilers.
Finally, municipal solid waste
(MSW) can be used as a fuel.
Keep in mind, however, that
using MSW as a fuel can present
challenges such as a lack of
acceptance by local residents,
difficulty in communicating the
effort to customers, and invest-
ing in safety measures to comply
with local regulations.

6. 6The Profitable Shift to Green Energy
Executive Agenda
gas), and a company’s demand pattern. The development of shale gas in North America and
elsewhere is expected to dramatically reduce the price of gas—and thus electricity—making it
even harder for renewable energy projects to compete.
Technological effectiveness. Technology is especially important because renewable-energy
sources yield widely varying amounts of energy, differ significantly across regions, and often
depend on site-specific parameters. Thus, a one-size-fits-all technology is unlikely to make
sense for a global company. The most popular renewable-energy strategies are usually those
that implement a portfolio of various technologies—even as they can cause problems with
operating competencies and involve high maintenance costs. As an example, biogas installa-
tions require permanent care and quality control, but photovoltaic (PV) systems require only
a fraction of the manpower to operate.
Most renewable-energy technologies are evolving rapidly, and feasibility studies performed
only a few years ago might look entirely different today. The lesson here is that going green with
renewable energy is not a one-time decision. Rather, it is a multifaceted, continuous process of
building up the right portfolio in the best way (see figure 3).
Notes: Biomass fired is the burning of residue, wood chips, and municipal solid waste, among others. Biogas is the anaerobic digestion of biogradable
materials. CHP is combined heat and power. O&M is operations and maintenance.
Source: A.T. Kearney analysis
Figure 3
As most renewable-energy technologies are evolving rapidly, going green is
a continuous process
Technology Biomass
fired
Biogas
(anaerobic
digestion)
Onshore
wind
Offshore
wind
Photovoltaics
(PV)
Concentra-
ting solar
power
Total
cost
($/kWh)
14–162011 14–16 7–13 15–19 22–28 19–30
Key appli-
cations for
industrial
consumers
• Process heat
or steam
generation
• CHP configur-
ation possible
• Process heat
or steam
generation
• CHP configur-
ation possible
• Upgrade to
natural gas
equivalent
possible
• Electricity
generation
• Electricity
generation
• Electricity
generation
• Heat and
steam gener-
ation, difficult
for large
process appli-
cation because
of intermittency
• Electricity
generation
Feasibility
for industrial
consumers • Depends on local fuel availability
and long-term price risk
• Public resistance possible
• Very high
investment
• Early stage
technology
• Geographic
availability
Short-term
energy on
demand
• Dispatchable,
usually steered
by heat demand
• Dispatchable,
usually steered
by heat demand
• Stochastic
generation,
short-term
predictability
• No storage
• Stochastic
generation,
more stable
than on-shore
• No storage
• Stochastic
generation,
but more
predictable
than wind
• No storage
• Public resist-
ance possible
• Good life-cycle
cost manage-
ment needed
• Shaping of
intermittent
generation
• Very high
investment
• O&M risks and
grid integration
issues
• Long lead times
• Shaping of
intermittent
generation
• Easy to deploy
• High capacities
needed to con-
tribute to CO2
targets
• Shaping of
intermittent
generation
• Dispatchable
if thermal
storage is part
of concept
13–152020 13–15 6–10 9–12 10–17 11–27
Low feasibility
High feasibility

7. 7The Profitable Shift to Green Energy
Executive Agenda
Incentives. Incentive mechanisms differ from country to country and state to state, but there
are two general types: feed-in tariffs and tax credits.
• Feed-in tariffs define a fixed rate per sold kilowatt hour from renewable energy sources. The
system is common in most European countries, is used in the Canadian province of Ontario,
and is being considered in other regions of North America. The intent of feed-in tariffs is for
the electricity seller to benefit from the incentive to stimulate demand for renewable-energy
applications. Although CPG firms and retailers tend to consume the generated electricity so
they can claim true “green-ness,” this system is of little help. Nevertheless, a company might
decide to embark on a safe-haven investment under this kind of incentive, if only as a way to
gain experience for investing in self-consumption once lower technology costs make such
incentives unnecessary.
• Tax credits are common in North America. These credits reduce the burden of the upfront
capital investments by granting a tax refund on a share of the investment (investment tax
credit) and credits or depreciation allowance for each kilowatt hour produced over a certain
period (production tax credit). Because these credits generally do not require selling the
energy produced, they are ideal for retailers and CPG companies.
Energy projects, whether conventional or
renewable, are generally capital intensive
and require large initial investments.
Capital expenditures. Capex is usually the most important—and in the case of solar and
wind projects, the only—material cost component and therefore a key driver of project profit-
ability. Capital expenditures are driven not only by technology sourcing, but also by tailoring
engineering and project design to specific site conditions.
Operations and maintenance (O&M). While operations and maintenance comprise a relatively
small cost component, they are essential to plant functionality and, thus, yield. O&M costs are
often based on the level of variation. Different versions of technologies at various locations are
incredibly cost-intensive, while larger numbers of identical technology allow for better condi-
tions in O&M service contracts.
Clearing Capital Hurdles
Energy projects, whether conventional or renewable, are generally capital intensive and require
large initial investments. Because such projects are low risk and have a long life span, typically
20 to 30 years, payback periods tend to be lengthy. How does this jibe with retailers and CPGs
that typically target 10-year payback periods at 12 to 18 percent? Our experience is that it
doesn’t. Instead, a third-party contractor can take on the capital burden and deliver energy
savings through up-front pricing agreements. While high-return projects are common in
product development, they are less so in renewable energy, without putting the project at risk.
Adding to the challenge is the convergence of aggressive sustainability targets, a fragmented
operations footprint, and varying energy needs. In most cases, targets cannot be met by

8. 8The Profitable Shift to Green Energy
Executive Agenda
Note: IRR is internal rate of return.
Source: A.T. Kearney analysis
Figure 4
Examples of varying degrees of commitment for renewable energy projects
Full
ownership
Partial
ownership
Contracting Power purchase
agreement
Certification
Capital
requirements
• High requirement
because company
has full ownership
• Shared capital
with partner
• Generally, no
capital required
• Investment
possible
• No capital • No capital
Human
resource
requirements • High internal
resources and
expertise required
• Resources can be
shared with partner
or taken over by
partner
• Very limited
requirements of
own personnel
• No requirements • No requirements
Profitability
• Project IRR of
8-10% on 20 years
• Project IRR of
8-10% on 20 years
• Energy at or slightly
below market prices
• Attractive because
of limited capital
requirements
• Cost-neutral
replacement
of conventional
energy possible
• Negative impact
on cash flow
Developing
expertise
• Development
possible but own
expertise already
required for
successful project
• Development
possible
• Import of initial
expertise by
partner
• Only limited
possibilities
• Not possible • Not possible
Low attractiveness
High attractiveness
silver-bullet projects but by tailored, multisite projects. This requires significant incremental
resources to manage development, construction, and operations. Companies want projects that
need limited capital investment and minimal internal resources. Therefore, they need to identify
the best capital and internal resources that will deliver the most profitable project, especially
when going green with a renewable technology. Figure 4 shows renewable energy projects and
varying degrees of commitment.
Ownership. Obviously, full—and even partial—ownership requires significant capital investment.
What might not be as apparent is that ownership requires significant internal resources to
develop and operate a plant. These kinds of investments typically generate 8 to 10 percent
return rates over a 20-year project lifetime, certainly not very desirable returns for the typical
retailer or CPG company. The advantage of ownership is in gaining internal expertise, having
more control over production and future development, and being independent from conven-
tional energy sources or green-energy providers that might not be qualified.
Contracting. A contract structure eliminates the main disadvantages of ownership. For example,
the developer handles project design, financing, construction, and operation. Contracting also
allows energy purchases at or below market prices.
For some renewable-energy sources—wind, for example—production needs to be shaped
to demand. This can be accomplished either through the developer or contracted out to the
incumbent utility company—a scenario that can put significant strain on project profits.

9. 9The Profitable Shift to Green Energy
Executive Agenda
The downside of using a developer is that it is harder for the contracting firm to gain green
expertise, but this can be resolved by hiring some of the developer’s engineers or flipping
ownership after 15 or 20 years.
Powerpurchaseagreements(PPA). A PPA is a long-term agreement—typically 10 to 20 years—
with a developer or utility to purchase a certain volume of green power at a fixed price. For wind
and solar projects that generate intermittent power, the purchase can be for demand-specific
volumes from either the utility or a third party. As with a contract strategy, a PPA requires no
capital and no owned resources. On the other hand, as with contracting, a PPA does not allow
for developing internal green-energy expertise and requires a long-term commitment. Although
attractively priced, tailored PPAs are not available everywhere.
Certification. Companies that acquire renewable energy certificates go green without actually
changing their energy consumption portfolio. They claim green status by buying a commitment
incremental to the company’s current energy costs. The strategy is neither cost-neutral nor
profitable and may well be of little value in terms of public perception.
The Path to Green
As major retailers, manufacturers, and utilities pursue the value of going green, three lessons
can be used as guidelines to a stronger bottom line:
Don’tsacrificeprofits. Companies can make good on sustainability pledges and still create
value. Remember, however, that returns are typically below industry norms, especially for CPG
companies. We have helped clients find partners along the energy supply chain that have lower
thresholds or longer investment horizons to overcome this obstacle.
Considertheentirespectrumofsolutions.While overall complexity needs to be managed,
our experience is that an all-inclusive approach is most effective, such as improving energy
efficiency while scouting for renewable-energy options. This is the best way to evaluate the
full spectrum of solutions and potential partnerships. Rather than cross-subsidizing renewable
energy with energy-efficiency gains, we look at a portfolio of options and then pick the combi-
nation with the best outcomes.
Focusonpartnerships.Finding the right development or financing partner can make all the
difference. Seek out relationships with reputable technology suppliers and service providers
to help ease the learning curve. This will require a significant amount of strategic consideration
and mid- to long-term vision. The “lowest bidder no matter what” approach is not the way to go.
Authors
Kish Khemani, partner, Chicago
kish.khemani@atkearney.com
Peter Findlay, consultant, Toronto
peter.findlay@atkearney.com
Jochen Hauff, director of renewable
energy and sustainability, Berlin
jochen.hauff@atkearney.com
Mathias Wiecher, consultant, New York
mathias.wiecher@atkearney.com
The authors wish to thank Marnik Verdonck for his contributions to this paper.

10. Executive Agenda
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