Mark Vachon

How’s GE’s ecomagination  going?

I put that question today to Mark Vachon, who is vice president for ecomagination at GE. He replied by talking about natural gas.

“The large macro trend of gas is massive,” he said. “Our oil and gas business will be a huge beneficiary.”

An abundance of shale gas in the U.S., and methane gas reserves in Australia present a wealth of opportunities for GE, which plays all along the supply chain for natural gas.

“We’re a massive player in gas exploration,” Mark said. “We have a water business that can deal with issues in the fracking process.” And, of course, GE sells lots of gas-burning turbines, including a new combined cycle power plant, currently available in Europe, that enables gas to be burned more efficiently and in concert with renewable energy. (See my June blogpost, GE’s big bet on natural gas)

But can you put “ecomagination and shale gas in the same sentence? Yes,” Mark said. GE will focus on making shale gas cleaner, “with technologies like zero-leak valves” and water filtration products like a mobile evaporator that is basically a truck (see below) “designed to enable on-site frac water recycling, reducing the volume of wastewater and fresh water that needs to be hauled to and from the project site.”

Like it or not, natural gas is the big story today in the energy business. This is good for GE. It’s probably good for the U.S., given our domestic supply. Whether it’s good thing for the climate is very much an open question. If cleaner-burning gas plants replaces dirty coal plants, they will bring meaningful but incremental progress towards a climate solution. If cheap, abundant natural gas stalls the development of low-carbon renewable energy, or discourages investment in new clean-energy businesses, that’s a problem. Chances are, it’ll do both.

I met Mark near the U.S. Capitol, where he was headed for meetings on energy security with House leader John Boehner, among others. He has overseen GE’s ecomagination portfolio for Jeff Immelt since last October. Ecomagination products include efficient aircraft engines and locomotives, appliances, and LED and CFL light bulbs as well as GE’s gas, nuclear, renewable energy and smart-grid businesses; they’ll generate $20 billion to $22 billion in revenues this year, Mark estimates. The 52-year-old exec, who has been with GE for 28 years, was previously President & CEO of GE Healthcare’s $9 billion Americas Region. He still lives in Milwaukee, where the healthcare business is based, but because one of his jobs is to make ecomagination more global, he has traveled this year to Abu Dhabi, Dubai, Israel, Europe, Australia and China, and he’s soon headed to Brazil.

So if the gas business is booming, where are the challenges in the ecomagination portfolio?

Nuclear’s an obvious one. The son of a nuclear engineer, Mark believes in the technology but says, post-Fukushima, that “it’s very clear, at least for the moment, that we’re in a hiatus.” But, he added, “the nuclear industry is very good at learning from its mistakes.”

Wind, too, faces short-term issues, he said: “It’s clearly challenged over the next couple of years.” Without clean-energy mandates or tax subsidies, wind struggles to compete with cheap natural gas. And there’s uncertainty about those subsidies, particularly in the U.S. where Congress is looking to manage budget deficits.

This past spring, GE made a major commitment to solar PV, drawing on technology developed at the National Renewable Energy Lab. Mark said the company will site a manufacturing plant in the U.S. to make the panels.

Does GE remain committed to ecomagination despite the gloomy policy environment in the U.S.? After all, Immelt put his reputation on the line by becoming a vocal advocate for climate regulations through the U.S. Climate Action Partnership. That didn’t end well.

“Business has to step up and act,” Mark said, nothing that GE plans to buy 25,000 electric cars for its own fleet.

“We are not going to wait for policy,” he added. Good thing.

Take the creativity of countless startups, the heft of a big corporation, $200 million in prize money, savvy venture capitalists, the power of digital media and the wisdom of crowds.

Put them together and you have the ingredients of GE’s Ecomagination Challenge, a promising way to speed innovation towards a smart grid, clean energy and eco-friendly homes, buildings and cars.

Promising…because we won’t see results for a while.

Unveiled with fanfare by GE chief Jeff Immelt in Silicon Valley in July, the Ecomagination Challenge has generated more than 3,000 entries and 60,000 comments and votes. This week, GE will announce the top vote-getters and next month it will announce the winners, which are selected by a panel of expert judges.

GE and its four venture capital partners–Emerald Technology Ventures, Foundation Capital, KPCB and Rockport Capital Partners–have said they will invest $200 million into the most promising startups and ideas. Grants could range from $100,000, to further research a new idea, up to significant equity investments in existing startups, which would also get marketing and manufacturing support from GE. GE already has significant investments in clean tech companies like A123 Systems, which makes batteries, and Southwest Windpower, which makes small-scale wind turbines. This is an effort to find more.

How’s it going? Some of the ideas seem, to put in kindly, long shots. An electric generator powered by garlic? (See it on video here.) Rotating houses? A “Wind Turbine Electricity Generation Without the Wind.” What’s next: solar panels that don’t need sunshine?

Amidst the thousands of entries, several caught my attention, and the attention of voters:

Julie and Scott Brusaw

One is Solar Roadways, the  brainchild of a mom-and-pop couple in Idaho. Scott Brusaw is an electrical engineer, a former sergeant in the Marine Corps and a former Boy Scout scoutmaster, and his wife Julie Brusaw is a marriage and family counselor. They want to make roads out of solar panels, protected by a material similar to that used in the “black boxes” in airplanes. LEDs could be added to light up roads at night, and heating elements could be installed to melt snow, all powered by the sun. They’re even talking about putting sensors in the roads to warn drivers if animals are crossing. The Brusaws got a contract from the Federal Highway Administration to build a prototype in 2009, and he was invited to give an entertaining TEDx talk last spring in Sacramento.

Interesting, too, is Welectricity, which is described as “a social network that promotes household energy efficiency through behavioral nudges.” Think Facebook meets your utility bill. Electricity users could set up profiles, and their bills would be graphed and compared to one another. (You could send a boastful tweet when your bill is lower than your neighbors!) The idea comes from Herbert Samuel, an energy consultant from the Caribbean island of St. Vincent.

I was also struck by an entry called From Net Zero to Waste Zero which uses a combination of solar PV, wind and geothermal energy to design a low-cost house that lives off renewable power. (That’s an image of the house, above.) The idea comes from Sam Qin, a Canadian entrepreneur who coordinated the design of a zero net-energy house for the Canadian government during the 2008 Beijing Olympics.

Whether any of this is truly new–and, more important, scalable–is very much an open question. If we lived in a perfectly efficient economy, where any entrepreneurs could get a hearing at venture capital firms, and the best ideas would get funded, we wouldn’t need a competition like this. But we don’t, and that’s why new models for innovation–like the automotive X-Prize--are worth trying. If nothing else, GE’s challenge has spurred a lot of online conversation and positive buzz for GE.

“Responsible business,” says Bob Corcoran, “is good business.”

And what’s responsible business? “Make money, make it ethically and make a difference.”

Bob Corcoran

Bob is vice president for corporate citizenship at GE, a 30-year company veteran, and a good guy. We met in 2o04 when we traveled together in Ghana while I was reporting a story on GE’s values for FORTUNE. (See Money and Morals at GE.)  Recently we spoke about GE’s 2009 citizenship report, and about what GE has learned in the past five years from its corporate citizenship efforts, including its high-profile campaign around Ecomagination, which focuses the company, and its marketing, on products and services that help solve the world’s big environment problems.

Inside GE, Ecomagination is deemed a success, so much so that it has spawned a sister initiative (if you can spawn a sister) called Healthymagination, focused on profitably creating better health for more people. GE says that it expects Ecomagination product revenues to grow at twice the rate of GE’s overall revenue between now and 2015.

The logic behind both initiatives is simple, Bob noted. Big global problems demand big solutions from big companies. GE prides itself on “tackling the world’s most complex and pressing problems,” as chief executive Jeff Immelt writes in the report.

The trouble is, the payoff for GE’s shareholders have been disappointing. I didn’t realize just how disappointing until I put together this chart comparing GE’s stock-price performance to the S&P500 and to a couple of its conglomerate competitors, Siemens and United Technologies.

In the past five years, here’s how the numbers look:

GE: -54%

S&P500: -10%

Siemens: +25.3%

United Technologies: +39%

Yikes.

Now, there are a lot of explanations for this. Perhaps the biggest is that  GE, unlike its peers, has been in a couple of business that have suffered in the last five years–GE Capital, its finance operation, and NBC Universal, its TV, cable and Hollywood unit, which is now being spun off into a joint venture with Comcast. Their problems mean that GE’s fundamentals look only a bit better than its stock price: Revenues have grown from $72 billion  (2004) to $157 billion (2009), profits have slid from $16.3 billion (2004) to $11 billion (2009). Profits are back up again this year, and Bob says the company is poised to grow.

In any event, there’s no doubt that GE takes its corporate responsibilities seriously. This citizenship report is thoughtful and detailed, reporting on everything from the company’s greenhouse gas emissions (down by 22% from 2004) and water usage (down by 30% from 2006) to its illness and injury rate (down by 16% in a year) to the number of employees fired (118) as a result of ethics complaints filed with about 700 GE ombudspersons (their word, not mine) around the world. There’s much, much more here.

Behind the numbers are compelling stories. GE writes about reverse innovation–the idea that along with developing high-end products for the US or Europe, the company will create low-cost products in poor countries and then distribute them globally. For example:

In countries like India and China, where per capita incomes are smaller, customers often prefer decent performance at an ultralow cost. This insight led a GE Healthcare team in China to develop a U.S. $1,000 handheld electrocardiogram device and a U.S. $15,000 portable ultrasound — each a fraction of the respective technology’s typical price. Given these markets’ infrastructure challenges and high rural populations, such products have helped meet critical human needs — and demand has followed.

Insights gleaned from China and India can then be used to help deliver health care in the west at lower cost.

Another example: Many environmental NGOs worry about how people will adapt to the impacts of global warming–higher temperatures, water shortages, disease, flooding of low-lying areas and who knows what else–but this isn’t, as far as I know, a mainstream business issue, except perhaps for the insurance industry. To its credit, GE convened a group of sustainability experts last year to discuss the threat and figure out if GE’s businesses could help vulnerable communities prepare.

GE has gotten much better at listening to critics and outside voices, and in working with them. Just this week,  GE said it will expand a partnership with the Environmental Defense Fund to help cities, hospitals and universities save energy by using its “Treasure Hunt” program. GE’s citizenship report includes a commentary by a panel of outside experts, including such CSR gurus as Simon Zadek and Jane Nelson. They write: “Undoubtedly, GE continues to demonstrate leadership in vision, aspiration, strategy and practice on the ground.”

But not leadership in financial performance, alas. After I ran the numbers, I emailed Bob for a comment. Here’s what he had to say:

The company is always managing through a number of factors — product launches, regulation, pension expense, things like that. So we have positives and negatives. But…we are positioned for attractive earnings growth in 2011.

GE is focused on value creation (evident in our second quarter earnings). We’ve repositioned GE Capital for significant profit growth and competitive advantage, our Infrastructure businesses are benefiting from a strong global position and continued R& D investment, we’re focused on process excellence (the foundation of a strong CSR strategy), and our strong cash position gives us lots of flexibility in capital allocation decisions to create long-term shareholder value.

I think as more things come into focus on GE Capital returning to earnings growth, financial regulatory reform, this just gives us tremendous flexibility from a cash standpoint in terms of where we invest and how we grow. Building expertise and value around process excellence. Our margins are good. Our cash flow from operating activities are good. Our risk management has held strong. So I think investors should feel good about that.

Since 2004, when I wrote a story for FORTUNE called Money and Morals at GE , I have been an admirer of General Electric and its CEO, Jeff Immelt. My admiration deepened when GE unveiled EcoMagination, its effort to solve important environmental problems. Immelt and GE also led the U.S. Climate Action Partnership, an alliance of big business and big NGOs committed to getting the government to regulate greenhouse gas emissions.

Jeffrey Immelt

But–and you knew there’d be a but, didn’t you?–I’ve got a couple of questions about GE and Immelt that have been nagging at me. First, has GE become overly focused on Washington? Second, when will Immelt deliver for GE shareholders?

The first question was prompted by an aside in John Harwood’s column in The Times a week ago, about the Obama administration’s all-out effort to get Ben Bernanke confirmed as Fed chief. He wrote:

The investor Warren Buffett and Jeffrey R. Immelt, the chairman of General Electric, helped contact senators, a senior official said.

There’s nothing wrong with this, of course; Immelt has the right to ask senators to support Bernanke. But it reminded me that this registered Republican and his company have closely aligned their interests with the administration. Immelt serves on the president’s Economic Recovery Advisory Board. Newly-released figures show that among big companies or unions, GE was second only to Exxon Mobil in lobbying expenses during 2009, spending $21.4 million. (Other sources put the figure higher.) This isn’t a surprise–GE is a huge company (2009 revenues were $156 billion) and it has a myriad of Washington interests, including taxes, trade, energy policy and financial regulation.

But there’s more. GE’s Washington operation is a case study in Washington’s revolving door. Nancy Dorn, who runs the office, worked for Dick Cheney at the Pentagon and the White House and was deputy director of the Office of Management and Budget during Bush II. At OMB, she suceeded Sean O’Keefe, who became NASA administrator and is now vice president, Washington operations, for GE Aviation. GE also has Linda Hall Daschle, wife of former Senate Majority leader Tom Daschle, lobbying on its behalf. Meanwhile, Mr. Daschle is on the board of advisors to GE’s HealthyMagination initiative.

Last summer, a leaked email from GE Vice Chairman John G. Rice, soliciting donation’s to GE political action committee, laid out the GE-DC connections. According to Steve Milloy, a right-of-center anti-environmentalist who obtained the email, Rice wrote:

The intersection between GE’s interests and government action is clearer than ever.

GEPAC is an important tool that enables GE employees to collectively help support candidates who share the values and goals of GE. [emphasis added]

On climate change, we were able to work closely with key authors of the Waxman-Markey climate and energy bill…If this bill is enacted into law it would benefit many GE businesses.

And so forth. You won’t be surprised to learn that GE’s “values and goals” were more aligned with Republicans betwen 2000 and 2008, when most of its donations went to the GOP. Now they mostly go to Democrats. To be sure, this business-as-usual in Washington, but it’s revealing.

So what did GE get for its investments in lobbying and campaign contributions?

The quid pro quo is never obvious but you can be sure that GE didn’t spend millions of dollars without the expectation of a significant return. The Wall Street Journal took a good look a couple of months ago in a story headline General Electric Pursues Pot of Washington Gold [subscription req'd] and wrote:

GE has high hopes for the [Washington] strategy. It says that over the next three years or so it could bring in as much as $192 billion from projects funded by governments around the globe, such as electric-grid modernization, renewable-energy generation and health-care technology upgrades.

My favorite quote in the story comes from Immelt, who says: “We’re all Democrats now.” He also said: “The government has moved in next door, and it ain’t leaving.” Give him credit for directness.

So, for example, GE strongly supported the $787-billion stimulus package and helped its customers apply for funds. When the government announced grants for smart-grid projects, GE did well, according to The Journal:

Of the 100 smart-grid grant recipients Mr. Obama announced last month, one-third were GE clients. GE declines to say what portion of the $3.4 billion in government money went to its customers. Its executives have told analysts that GE stands to reap up to $500 million in contracts from every smart-grid project built in a city with a population of more than one million.

GE’s wind and solar businesses benefit from clean energy subsidies. It’s hoping to develop clean coal projects, which get billions in government loan guarantees. Batteries for electric cars? Yes, they get government grants and loans and GE is an investor in a well-regarded supplier, A123 Systems. As I reported last fall:

A123 has been given more than $600 million in grants, loans or tax credits  by the federal and state government to build a new plant in Michigan. They include a $249 million grant from the DOE’s Electric Drive Vehicle Battery and Component Manufacturing Initiative, another  $100 million in refundable tax credits from the state, and $27.5 million more from the U.S. Advanced Battery Consortium.

GE also makes locomotives which, presumably, stand to gain from the $8-billion in stimulus grants announced last week by the Obama administration, and its aviation business is heavily regulated. (GE does not disclose how much revenue it generates from the government, directly or indirectly.) But as a big financial services company, GE took advantage of FDIC loan guarantees for up to  $139 billion of the debt of its GE Capital division when credit markets seized up late in 2008. Here’s an interesting Washington Post/Pro Publica story about how GE qualified for the FDIC’s help.

People on the left say that all the subsidies for  GE amount to corporate welfare. Free marketers call it rent seeking. In any event, there’s no way GE can ignore Washington without seeing its performance suffer.

Not that GE’s performance has been anything to boast about. The company sharply reduced its dividend and lost its AAA credit rating last year. GE’s share price is down by 60% since Immelt became CEO in on Sept. 7, 2001—unfortunate timing, because the market swooned after the September 11 attacks. But GE has lagged the market as a whole during that period, as well as during the past five years, a more apt reflection of Immelt’s efforts, since it took time for him sto have an impact. Here’s a chart comparing GE’s stock price to the S&P500 over the last 5 years, and here’s one covering Immelt’s entire tenure.

I don’t know GE well enough to say whether there’s a connection between GE’s focus on Washington and its subpar performance. Certainly questions could be asked (by the board?) about whether GE executive time and shareholder money might have been better spent elsewhere—developing new products, say, or improving service to customers. To its credit, GE has sustained a big, global R&D operation while other companies have cut back.

I do know that as the federal government grows in size and influence, corporations will spend more of time and money in Washington. (The Times reported today that the health care and insurance lobbies spent more then $648 million in 2009.) Business will also do more to influence elections, particularly after the recent U.S. Supreme Court ruling.

What to do? Surely one way to reduce the influence of special interests in Washington is to give them less government to be interested in.

GE’s chief executive, Jeff Immelt, opened the Net Impact 2009 conference this morning at Cornell University and, as usual, he was thoughtful and provocative. He was bullish on GE, of course, but, after this tough year for the U.S. economy, he sounded more pessimistic than usual  about where the country and its economy are going.

The American consumer, the financial services industry and the construction industry were the major drivers of America’s long boom, going back to the 1980s. None is likely to drive  economic growth in the future, Immelt said.

Instead, he noted, growth will be most robust in the developing world–places like China, India and Brazil that have bounced back more quicly than the U.S. from the global downturn–and it’s by no means clear that U.S. industry is positioned to capitalize on that growth.

Immelt said:

There’s more growth outside the United States than there is inside the United States. We have to recognize that our destiny is connected to the emerging world. We have to repurpose ourselves as an exporter.

The trouble is, the U.S. isn’t educating as many engineers as it should be, he said. Nor are the U.S. government and U.S. companies investing as much as China, say, in energy research and development. Public policy. also remains a big question mark when it comes to energy because, so far at least, Congress has been unable to pass regulation of global warming pollutants. Other countries are moving faster.

“There’s going to be 10 million jobs created in clean energy,” Immelt said. The question is, will those jobs be in the U.S., in China, or elsewhere?

In the audience for Immelt were more than 2,000 members of Net Impact, a great organization whose purpose is “to inspire, educate, and equip individuals to use the power of business to create a more socially and environmentally sustainable world.” (Disclosure: I’m a new member of the Net Impact board.) Immelt has made GE’s “ecomagination” campaign a hallmark of his tenure as CEO and he said his focus at the company has been to marry capitalism and sustainability.

Immelt began his conversation with the Cornell president, David Skorton, by contrasting the state of the U.S. economy when he began his career with the economy Net Impact members will find as they begin their business careers. (Note: these may not be his precise words but they are close.):

In 1982, the year I joined GE, about 10% of the earnings of the S&P 500 were in financial services. The US was a net exporter. R&D as a percentage of GDP was in the mid single digits. GE revenues were 80% in the U.S., 20% out of U.S.”

By 2007, financial services earnings as a percentage of the S&P were about 45%. The U.S. was a net importer…R&D as a percentage of GDP had slipped to about 2%.

None of these trends are good, of course. By contrast, GE continues to invest in R&D–about $3 billion in energy technology alone, Immelt said. And about 80% of GE’s revenues come from outside the U.S. His not-so-subtle message was that the U.S. needs to behave a lot more like GE. Fair point, although some GE shareholders might disagree–the company’s stock price remains well below what it was when Immelt took over in September 2001.

Some other highlights from Immelt’s talk:

He’s a bigger believer in wind power than in solar. He had resisted investing in wind at first. “The team pitched me wind for two years. I said this is a hula hoop.” But when Enron went bankrupt, and its wind business became available at a discount, Immelt figured he’d take a flyer on it. “For $200 million, how wrong can we be?” Today, wind is a $6 billion business for GE. Solar energy, he said, remains too expensive to compete, at least for now.

He’s serving President Obama, but didn’t vote for him. Immelt called himself a lifelong Republican, but he agreed to serve on the president’s Economic Advisory Board. Obama, as it happens, has been very good to GE–the company’s wind business, its investment in battery firm A123 Systems, its work on the smart grid and its research into cleaner coal all stand to benefit from administration policy.

He tries to guard against hubris. “Do we get too big and too arrogant to see what’s going on,” he said. “Arrogance is a terrible blinder.”

He still thinks green is green. He said the value that GE brings is its ability to marry capitalism and sustainability–by making and selling products and services that solve the world’s big problems.  He said: “You can build a different business model, you can solve global issues, you can impact a new set of customers and you can make money. We’re proud of that. We don’t back off that. That is who we are.”

Let me state my bias upfront: I’m am admirer of GE and its chief executive, Jeff Immelt, and the company’s ecomagination initiative. GE and Wal-Mart are, as I have written, the most influential companies in America, and it’s great that they are serious about becoming more sustainable, and working with their customers and suppliers to do so as well.

But I can’t help but be struck by the extent to which GE’s clean-energy businesses depend on federal and state tax and regulatory policy, along with grants and loans from the government. Wind energy, solar energy, nuclear power, cleaner coal, smart-grid initiatives, energy-efficient appliances, compact fluorescent light bulbs—all of these either benefit from current policy, get stimulus money or Department of Energy grants, or stand to benefit if the climate-change legislation strongly supported by GE is enacted into law, or all of the above.

This is fairly obvious, admittedly, to anyone paying attention to the energy and climate debate, but it was brought home to me vividly last week, at a GE Ecomagination Forum that focused on GE Capital’s venture investments in clean tech startups. You can read more about GE’s venture business in this column I wrote for fortune.com, called GE Brings Good Things to Startups, and in an interview and podcast with Kevin Skillern, the managing director of venture capital for GE Energy Financial Services, which are available at Greenbiz.com. Since 2006, GE’s venture fund has smartly  invested about $160 million in 20 startups in such businesses as wind and solar power, batteries, energy-efficiency, smart grid and fossil fuels.

Of GE’s portfolio companies, the star performer and recipient of GE’s biggest investment – about $69 million – is a company called A123 Systems that makes advanced lithium ion batteries and appears to have a very promising future. A123 makes batteries for the transportation, utility and consumer markets, for such customers as Daimler, Chrysler, Volvo, Better Place/Renault, Black & Decker, AES and Procter & Gamble’s Duracell unit.  Investors alongside GE, which is A123’s biggest shareholder. include Sequioa Capital, ConocoPhillips, AES, Motorola and P&G. Google founders Larry Page and Sergey Brin drive electric cars powered by A123 batteries, as does Tom Hanks. Not a bad list of endorsements.

Here’s the thing, though. A123 has been given more than $600 million in grants, loans or tax credits  by the federal and state government to build a new plant in Michigan. They include a $249 million grant from the DOE‘s Electric Drive Vehicle Battery and Component Manufacturing Initiative, another  $100 million in refundable tax credits from the state, and $27.5 million more from the U.S. Advanced Battery Consortium. Separately, Nissan, an A123 customers, got a $1.6 billion loan to retool a factory to make electric cars and batteries. The climate bill will provide another boost to electric cars. And, according to the company:

A123 was born out of the research labs of the Massachusetts Institute of Technology and was funded initially with a $100,000 grant from the U.S. Department of Energy in 2001.

In other words, the taxpayer investment in A123 probably exceeds GE’s by a hefty margin.

Southwest Windpower, another GE portfolio company, also benefits greatly from government subsidies, as its CEO, Frank Greco, explained last week. Southwest is the

A Skystream turbine

world’s leading producer of  small-scale wind turbines, which it manufactures at factories in Flagstaff, Arizona, and in a joint venture in China. It’s got leading-edge technology and lots of growth potential. Southwest’s  grid-connected Skystream 2.7 turbine can generate power at rates comparable to what some homeowners and businesses pay for retail electricity–after you factor in a federal tax credit and, in California and some other states, generous, state rebates. In fact, the subsidies can bring the $15,000 or so cost of a turbine down to about $5,000, in a best-case scenario–best case, that is, for the owner of the turbine, the company and its investors, including GE.

The story is much the same for Soliant Energy, another company showcased by GE: Very promising technology, impressive management, heavy reliance on government policy.

I asked  Skillern, who manages GE’s  venture investments in energy, whether he was worried that the portfolio carried too much political risk. What if, unlikely as it seems, a free-market administration came to power in Washington? He acknowledged the issue but said he thought all of the companies could survive and even thrive without government backing, but that the government support would speed up deployment of their technologies.

In any event, the tax dollars backing GE’s venture portfolio may turn out to be well spent. If A123, Southwest Windpower and Soliant all do well, they will create thousands of “green jobs” and help the world deal with the climate crisis–thereby delivering benefits to all of us. That’s the logic behind the government support. What’s more, we all pay the hidden costs of burning fossil fuels, as my friend Matt Wald reported this morning in the New York Times:

Burning fossil fuels costs the United States about $120 billion a year in health costs, mostly because of thousands of premature deaths from air pollution, the National Academy of Sciences reported in a study issued Monday.

Goodness knows that the oil and gas industries get massive government subsidies as well.

None of this began with the Obama administration, it must be said. The Bush crew, remember, rescued Wall Street and bailed out GM and Chrysler. Increasingly, we’re seeing the government is trying to manage not just the broad economy, but industries and companies as well. Health care, in some form or another, may be next. How this experiment in industrial policy will turn out is anybody’s guess.

But it’s no wonder corporate CEOs, including GE’s Immelt, find themselves spending so much time these days in Washington.

Earlier this week, I visited GE’s Global Research Center in Niskayuna, New York, near Albany. Cool place, the home base for about 1,900 scientists, and one of four GE research centers around the world. The others are in Bangalore, Munich and Shanghai.

I wrote a column for FORTUNE’s website about GE’s venture investments (GE brings good things to startups), about which I’ll blog a little more next week. But for today, a look at how GE’s research into how nanotechnology, which is the study of matter on a molecular and atomic scale, could help drive the wind turbine industry. This technology is inspired, in part, by lotus plants leaves that are able to repel water–an example of biomimicry, which studies nature’s best ideas and using them to solve human problems. GE’s goal, as the video below shows, is to come up with nano-coatings on wind blades or aircraft engines that repel water. This technology is inspired, in part, by lotus plants leaves that are able to repel water–an example of biomimicry, which studies nature’s best ideas and using them to solve human problems.

Materials that do a great job of repelling water are called superhydrophobic. An example would be nanopants–spill a soda on them, and the liquid would roll right off. Check out this video to see how it works–the water droplets below really, really don’t like the nanocoating. My only critique: GE should have set this video to music.

You can read a blogpost from GE engineer Joseph Vinciquerra about superhydrophobic technology, “Creating anti-icing surfaces,” on GE’s global research blog.

New smart appliances from GE will do great things. They will save energy, reduce greenhouse gases, curb  demand for power on the utility grid, generate “green jobs” in America and—oh, I almost forgot—clean your clothes, wash your dishes and keep your ice cream from melting.

GE's smart best-in-class hybrid water heater

They will also be financed, in part, with your tax dollars, if, as seems likely, the company has its way. Incentives for manufacturers like GE that make super-efficient appliances are already part of the Waxman-Markey climate-change bill awaiting action in the U.S. Senate. As GE explained it, the government would provide “awards” to best-in-class appliances of $75 per dishwasher, $200 per refrigerator and $300 per water heater, paid directly to the manufacturers. As I read Section 214 of the bill (and I could be wrong, since it’s not easy reading), the government would also pay retailers who sell best-in-class appliances.

Did you know that the government was going to subsidize appliance manufacturers? Me neither.

Last week, GE executives came to Washington to talk with government officials and reporters about their smart appliances. When combined with a smart electricity meter, a smart grid and distributed renewable energy, GE’s water heaters, washers, dryers, dishwashers, refrigerators and stoves would help enable the company to provide zero net energy homes by 2015. That’s very cool. (Here are details from GE.)

While appliances are not the most exciting or profitable of GE’s businesses—the company tried, without success, to sell off its appliance business a couple of years ago—GE does have a history of innovation in the business. GE gave us the first self-cleaning oven, the first fully automatic clothes washer and the first refrigerator that dispensed ice and water through the door (which saves energy along with wear and tear on the biceps muscle).

At a D.C. newsmaker event, Jim Campbell, the president and CEO of GE’s Consumer & Industrial division and a 30-year veteran of the appliance business, said:

I think Smart Grid-enabled appliances will usher in another revolution… a revolution in which these appliances will enable us to use energy more wisely…and help reduce greenhouse emissions.  And, in the process…GE and other manufacturers will lead the way to a new era of U.S. technological leadership… and the thousands of jobs that go with it.

How would the smart appliances work? Aside from being more efficient, they would talk to the utility grid and use less electricity when prices are highest—assuming, that is, that utilities adopt time-of-day pricing so that the amount they charge for electricity better reflects their actual costs. As a practical matter, thiw would mean that smart appliances would power down or delay operations to avoid using power during the daytime in summer when air conditioners operate and utility companies bring on their most expensive generation units to meet peak demand.

For example, a dishwasher could hold off running until late at night when rates go down. The defrost cycle of a refrigerator, which uses lots of energy, could also be automatically postponed until evening. Dryers could operate with less power, as could a new GE product, a Hybrid Heat Pump Water Heater that will be available later this year. (If you want to know more about the water heater,  see this. Or watch these videos of GE appliances.)

Of this new water heater, Campbell said:

Currently there are about 60 million homes in the United States with an electric tank water heater.  If even ten percent of those water heaters were replaced with this new Hybrid Heat Pump Water Heater… we could save as much energy as generated by 40 coal-fired power plants annually.

The water heaters will cost about $1500 apiece (compared to $500 or more for a basic water heater today) but they are expected to generate average energy savings of about $250 a year. Since they have a 10-year lifespan, that’s not a bad deal.

So there’s no doubt that these appliances deliver substantial benefits.  Let’s hope millions are sold. The question remains, does GE need a subsidy from your tax dollars to bring them to market? A couple of observations to put that question in context:

First, the state of Kentucky and the city of Louisville are already providing subsidies to GE to manufacture the water heaters. As a GE news release said this spring:

Up to $17 million in incentives from the state and metro government will be made available for the design and construction of the new energy-efficient hybrid electric water heater and for several other investments that the Company will make at Appliance Park over the next several years, which will total over $69 million…Kentucky also will provide funds to train employees for the new jobs and will exempt from sales tax certain materials purchased to construct new facilities.

GE’s unions also chipped in, approving a temporary wage freeze  to make the Louisville facility “more competitive and attractive than other manufacturing locations that were under consideration.”

Second, this is one of a plethora of targeted subsidies aimed at getting us closer to a clean-energy economy. GE is well-positioned to capture its share. GE makes wind turbines and solar panels , which get federal tax credits and are helped by state-mandated renewable energy requirements. (Of course, GE is in the heavily-subsidized low-carbon nuclear business and it wants to get into the business of “clean coal,” for which massive subsidies await.) GE also makes smart utility meters, a key part of the smart grid, which has been allocated $11 billion under the 2009 federal  stimulus package.

So every step of the way, taxpayer dollars come into play.

I asked Jim Campbell why GE needs the incentives to make smart appliances. He told me the company has been developing smart appliances on its own but that the Waxman-Markey incentives would accelerate their deployment. And, as we all know, there’s no time to waste when it comes to curbing greenhouse gas emissions. What’s more, GE’s Louisville-based appliance business is getting squeezed by weak demand and low-cost foreign competition.

“We’re in a very tough market right now,” Campbell said. “The appliance industry is down double digits.”

Fair enough. But I thought the appeal of a cap-and-trade scheme is that it would set a price on carbon and then let the market decide which are the most efficient ways to reduce emissions. Obviously, there’s a lot more deciding going on than we were led to expect.

GE's "smart" washer dryer on display in D.C.

General Electric and Wal-Mart are the two most important companies in America, for different reasons: GE’s reputation for management excellence means that its ideas spread widely, while Wal-Mart’s size and clout put it at the center of the consumer economy. Last week Wal-Mart announced its plans for a sustainability index, generating lots of excitement, and today GE releases a citizenship report that demonstrates that the $183-billion company is becoming not just cleaner and greener, but more open.

“We just crushed our energy consumption goals,” Bob Corcoran, GE’s vice president for corporate citizenship, told me when we talked recently about the report. “We have crushed our greenhouse gas emission goals. I feel very good about that.”

He added: “I’m sitting in a building right now” – GE’s corporate HQ in Fairfield, Connecticut – “that has solar panels on the roof.”

As you’d expect from the company that popularized the precision-driven Six Sigma approach to quality, GE’s citizenship report, its fifth, has no shortage of facts, numbers and metrics. But what struck me most about the report were the insights it offers into the changing GE culture.

GE is the No. 1 U.S. wind turbine maker

Before looking at the softer side of GE, a few hard facts.

On greenhouse gas and energy reductions, the report says:

In 2008, the Company reduced greenhouse gas emissions by 13% compared to 2004 levels. GHG and Energy Intensity have been reduced by 41% and 37%, respectively, compared to 2004. As a result, the Company achieved one of its three ecomagination goals in this area — to reduce GHG Intensity by 30% by 2008.

Of course, reducing “GHG intensity” isn’t as meaningful as reducing emissions in absolute terms. It’s noteworthy that GE did both.

The company also reports that sales of Ecomagination products, which are products identified by GE as helping to solve environmental problems, grew briskly, from $14 billion in 2007 to $17 billion in 2008. Ecomagination has had another big payoff, Jeff Immelt has told me—it makes people feel better about working at GE and helps attract new people to the company.

A key driver of the EcoMagination revenues is the wind turbine business acquired from Enron in 2002. According to the report:

GE is the number one wind turbine manufacturerin the U.S., and number two worldwide, with more than 8,700 wind turbines installed. Wind will be a $6 billion business for GE this year, up from $300 million when we bought it just six years ago.

Apart from all that, what the report shows is that GE is better than ever at listening to its critics, as well as to its own people. Pardon the jargon, but the company is becoming more of a learning organization.

As Corcoran put it: “The big change is probably that our ears are more open in more places.”

One example is the report itself: It includes comments from an advisory panel of outsiders, most from NGOs, who were invited to review an early draft of the report and recommend changes. The experts publish two pages of comments in the report, praising GE for paying greater attention to human rights and development issues this year, but saying that in the year ahead “should address how far its energy and climate commitments go in contributing to U.S. and global goals for climate stabilization.”

Here’s another way GE is tapping into the wisdom of crowds: It’s using “Treasure Hunts” in which its employees are enlisted to seek ways to save energy inside the company. Again, the driving notion here is that all intelligence does not reside with the senior execs of GE. (Watch this You Tube video of a 2008 Treasure Hunt at Universal Studios or read How GE’s ‘Treasure Hunts’ Discovered More Than $110M in Energy Savings at Greenbiz.com.)

More broadly, GE regularly convenes “stakeholder dialogues” where it brings in NGOS, including critics, to talk with the company about emerging issues. Recently, for example, the company convened a group in Washington to talk about how the world will adapt to (as opposed to mitigate) the impacts of climate change. Adaptation isn’t currently a business for GE, but you never know.

The regular conversations with outsiders have “helped us to really understand the impact that GE has, and can have, outside of our normal employee and customers relations,” Corcoran told me.

As Jeff Immelt puts in the report:

In the early years of my career, I had a typical businessperson’s reluctance to seek external opinions. A reset world brings a renewed opportunity to engage. Success in tomorrow’s markets means working with stakeholders to understand, predict, and shape our future environment and ways of living….Transparency and accountability will be more important than ever.

The evolution of GE—and Wal-Mart—around sustainability and corporate citizenship will eventually be recognized as one of the great business stories of this decade.

Solar panels on the roof of GE's headquarters

Imagine driving into a gas station, filling the tank and not knowing how much the gas cost–until a bill arrives at the end of the month. That’s how most of us buy electricity, it’s a crazy way to do business and, if all goes well, it won’t last.

Why? Because momentum is building behind the so-called smart grid, which, among other things, will make buying electricity more transparent. The $787-billion stimulus package signed into law today by President Obama includes $4.5 billion for a smart grid, along with tax incentives to promote solar and wind power.

This afternoon, an event called “Plug In to the Smart Grid” organized by General Electric and Google attracted a standing-room only crowd of more than 500 people to Google’s New York Avenue offices in Washington. Among the speakers were such power players as Carol Browner, the president’s climate czar (although she didn’t say anything), John Podesta, the head of Obama’s transition team and leader of the Center for American Progress think thank, and Chris Miller, a senior aide to Senate leader Harry Reid.

Washington’s renewable-energy crowd is downright giddy about the president’s push for clean energy.

“Look where President Obama has chosen to be today,” said Dan Reicher, a Google executive and former Clinton administration official who was co-host of the event, along with Bob Gilligan of GE. “He could be standing by a bridge or a highway. But he’s at the Denver Museum of Science, looking at a solar panel.”

Gilligan ticked off the advantages of the smart grid: “It enables higher penetration of renewables. It allows the utilities to operate in a more efficient manner. Most importantly, it empowers and enables consumers by giving them more information.”

Because a smart grid is essentially the application of information technology to the electricity business, Google (an IT company) and GE (an energy company) have joined together to push for better federal and state policy to enable the grid. This was their first outreach event in DC. Here are a few things I learned:

Information is power. Power over power, in this case. A smart grid will tell consumers how much their electricity costs at any given time of day, how much each appliance draws down from the grid, how their usage compares with their neighbor’s, perhaps even whether they are using clean or “dirty” power. So, for example, if consumers know that it’s cheaper to run the dishwasher or washing machine at night, many will do so. Can you think of a better way to promote energy efficiency in homes?

As Ed Lu, a Google executive (and former space shuttle astronaut for NASA), put it: “All of our work in this area is based on the premise that consumers ought to be able to see how much energy they are using.” Google’s working on a software, called the Google PowerMeter, to show consumers their consumption in real time.

Andy Karsner, the smart and outspoken former Bush administration energy official, said: “This is about full transparency and disclosure and empowerment of every consumer and small business in America. People ought to know how the biggest investment they make in their life performs, on the day they buy a new home.”

How that information will be delivered is no simple matter. It raises issues of privacy, intellectual property and security, among others.

The grid needs to get bigger and stronger, as well as smarter. Right now, there’s not enough transmission capacity to move wind power from the Great Plains to Chicago or solar power from the southwest to urban centers like Los Angeles.

“That’s going to require literally thousands and thousands of miles of new transmission, and we’ve seen very little (recently) in this country,” said Reicher.

To get major transmission lines built, the federal government will need more authority to site them, even over objections from state and local officials.

“Siting continues to be a problem,” Podesta said. It’s a lot easier to move oil and gas around this country than it is to move electricity, in part because the federal government exercises its power to get gas pipelines built.

Turning to Chris Miller, the Senate aide, Reicher asked: “Is the federal government going to end up with significantly more authority to site transmission lines?”

“Yes,” Miller replied. He said enhanced federal clout could be part of an energy bill that the Senate will take up this spring.

Karsner added: “This is not a question of the opportunity to bring solar from the southwest or wind from the Midwest. I would say it’s a necessity…If the planet could talk, it would say, stop choking me.”

Highlights from the Plug Into the Smart Grid event will be posted on Google’s DotOrg channel on YouTube (a Google property), where there’s also an interesting video about the Google PowerMeter gadget. We’ll also be looking at the smart grid during FORTUNE’s Brainstorm Green conference, with a panel that includes the CEOs of smart-grid firms GridPoint and Silver Spring Networks as well as venture capitalist and grid guru Chuck McDermott.