Capital Well's Next-Generation Solution byB

New Hampshire's Capital Well is facing a classic predicament; Its core product is rapidly becoming commoditized. It needs to innovate--fast. Here's how.

New Hampshire's Capital Well  is facing a classic predicament: Its core product is rapidly becoming commoditized. The solution is, in every respect, next-generation

Terry Swain, the president of Capital Well, has a problem. For more than 25 years, his little company of (now) 23 employees has been drilling artesian wells for New Hampshire homeowners and businesses: 250 to 500 feet into the state's famous granite—the ledge, drillers call it—which delivers crystal water, usually many gallons a minute. His customers like his company and will recommend it warmly. Capital Well has a growing and profitable water-treatment business. Swain's partners are a close-knit family: Mike Dragon, his vice president, is the brother of his wife, Cathy; and Mike, in turn, married Terry's sister, Libby. Both couples work in the business by day and still manage to enjoy one another's company in the off-hours. Mike and Libby's three sons, Greg, Joe, and Adam, are running the rigs and installations, and their best friend from high school, Dan Grace, works in sales. With nephews in the field, Swain looks forward to a smooth eventual succession. What's the problem?

To produce water and attach the wellhead to customer homes, Capital Well needs three drill rigs, three support trucks, four service vans, and everything from a couple of backhoes for laying pipes to a grouter to insulate them with silica. The equipment turns over in four to six years, and a single drill rig costs as much as $700,000, so at any given time Swain has $4 million to $5 million tied up. "We are a kind of manufacturing company; our factories take hours to set up and move around every day," Swain says. "It's very difficult if you don't have smart people on board, but we use nothing in the way of hardware that others can't buy." This is a recipe for price war, which has been pushing bids for new wells almost to their cost of production. It's hard for Swain to see how any company that simply drills wells could survive to be passed to the next generation.

"Our capital equipment costs run about $2.5 million a year," Swain says, "and these are pretty much fixed, no matter what the demand for wells. And so recessions in new construction can hurt us badly. Before 2008, we were drilling 400 to 500 wells a year; today, perhaps 225. But the prospects for the well business aren't great in any case." Demand is fluctuating or spiraling down, and there's tough competition over every job. How do you cover capital costs, which make sense only when the equipment is running sunrise to sunset virtually every day?

Customers don't want drills; they want holes, Ted Levitt, the legendary Harvard Business School marketing guru, famously wrote, urging manufacturing businesses to think more imaginatively about their products so as to avoid just this kind of commoditization. But what happens when there are no margins left in the holes, either? A Capital Well salesman will show up at your house at sunrise to bid on a new artesian well when your old well finally runs dry. He'll track new construction and the depth of other wells in the area. He'll take your call day and night. The game, which all well companies now play, is to get the job done faster and cheaper and more painlessly than the next guy. It can grind a person down. "If I didn't have to own a drill rig, I wouldn't," Swain says. "But if I don't have a hole in the ground, I don't have a business."

Swain, Dragon, and especially the young men who hope to succeed them have a solution, a new business venture, which on the surface may seem just another step in their company's cautious diversification. Actually, however, Capital Well is getting into something that portends a revolution in the way America will innovate itself back to robust growth with green "manufacturing" jobs—jobs that cannot be exported. I am speaking of geothermal heating and cooling, which independent businesses like Capital Well are critical to advancing.

This is the first of the green technologies that promises to go truly mainstream and is arguably the most important. About half of household energy costs goes to heating and cooling—considerably more in very cold climates like New Hampshire. Geothermal will get to a mass market not only because its value to consumers is so obvious but also because so many small companies like Capital Well, distributed across the country, are equipped to deliver it.

When most people think of advanced green jobs, they think of multibillion-dollar investments in plants making lithium-ion batteries for electric cars or photovoltaic panels and wind turbines for smartening grids. They fear, not without reason, that jobs in such plants will start in or migrate to the Far East. They certainly don't think of little well-drilling companies pushing a 6-inch-diameter pipe a few hundred feet into the ground. When most think of geothermal heating, moreover, they imagine deep, penetrating probes tapping into superheated subterranean faults in the earth's molten crust, capturing and channeling a kind of geyser. They don't think of a simple refrigerator.

But little well-drilling companies and something like your refrigerator's technology are actually the keys to geothermal. I won't go too deeply into the technical details, but the concept is so elegant and proven that you have to wonder why geothermal was not more highly developed years ago, even in the (fast disappearing) era of cheap oil.

Consider that every time you close your refrigerator door, you hear an electric motor kick on and the appliance somehow absorbs the heat from the food you just took out of the shopping bag and exchanges it with the ambient air in the kitchen. If the food has an average temperature of 50 degrees Fahrenheit, the refrigerator cools it to, say, 38 degrees. How does it do that?

Simply put, the heat is captured by the appliance's refrigerant (anhydrous ammonia, usually), which has been compressed into liquid flowing in sealed coils. The refrigerant vaporizes through an outlet valve in a closed loop of little pipes—in effect, boiling off with the heat from the food, the way alcohol "boils" off your skin with the heat from your hand. The heated, vaporized refrigerant is then pumped back into the compressor, where it is turned back into liquid, which causes it to release its captured heat. (It is the compressor you hear kicking on as soon as you close the door.) Finally, the refrigerant is forced into heat-exchanging coils in the back. That's why the back coils of a fridge are warm to the touch and the air blown out the bottom is very warm.

Now, something quite like this can be made to happen with your well water, only it's heat, not cold, that you are trying to produce. No matter what is going on with the weather aboveground—never mind the nor'easter blizzard—the ground just 4 feet beneath your lawn's frozen surface will remain at a constant temperature, roughly equal to the yearly average air temperature in your area. In New Hampshire, this is about 50 degrees Fahrenheit, and the temperature will be constant hundreds of feet down. The water in any New Hampshire well, therefore, will be pumped out of the ground at about 50 degrees, winter or summer. Any liquid pumped into the ground will warm or cool to 50 degrees.

And here is where your refrigerator's heat-exchange technology comes in. Imagine you could pump out your 50-degree well water and run it through coils filled with compressed refrigerant, which, when decompressing through its outlet valve, cools the water to, say, 40 degrees, much the way your refrigerator cools milk. Imagine, then, that the warmed refrigerant, storing the captured 10 degrees in a (more or less) gaseous state, is recompressed into outlet coils, where it returns to its liquid state, and is thus forced to surrender its concentrated heat—which is blown out by a fan. If you use enough water, and wed it to a big enough compressor, heat-exchanging coils, fan, etc., you can generate as much as 120 degrees in the outlet coils—and can warm an average-size, well-insulated home to 68 or more degrees in the coldest of winter. Return the 40-degree water to the ground, and it will soon be warmed back up to 50 degrees.

Run the process over and over, and the whole, integrated apparatus gives you central heating. Reverse the process and the same apparatus gives you central air conditioning. The only cost is the electricity that runs the water-circulating pump and the refrigerant's compressor. The more your electric utility moves to renewable energy, the closer your home comes to being a zero-emissions building.

Capital Well specializes in open-loop systems, which draw water from the well and return the water to the ground. The advantage is in leveraging the hole that customers would drill anyway. Closed-loop systems—more like the systems you find in refrigerators—are also increasingly popular. They can be laid horizontally in a big yard, or vertically in a smaller yard, or sunk in a half-acre pond. And because the system is one continuous loop, the fluid can be some kind of refrigerant, like the antifreeze you find in car radiators, that cools more than water and eliminates the need for a well pump, thus increasing the system's life span and reducing maintenance.

With either system, for every one unit of energy expended to pump and compress, three to four units are extracted out of the ground. The Environmental Protection Agency has estimated that geothermal heat pumps can reduce energy consumption—and corresponding emissions—up to 44 percent compared with air-source heat pumps and up to 72 percent compared with electric resistance heating with standard air-conditioning equipment, making geothermal the cleanest and most cost-effective space conditioning system available.

Clearly, this technology  promises to be a gain for the environment, but for Capital Well's customers, that is a secondary benefit. New Hampshire homeowners, typically heating 3,000 square feet, are a conservative, hard-edged bunch, and they endure the long winter any frugal way they can. They have to believe that the all-in cost of geothermal is attractive and the maintenance is painless. Otherwise, forget it.

The point is, geothermal's payback is (as they say in neighboring Massachusetts) a no-brainer. On average, the payback in the U.S. is about 12 years if the alternative is gas, five years if oil, and four if electricity. But for 3,000 square feet of new construction in New Hampshire, the payback is about three years for a gas or oil alternative, two years for electricity. Thereafter, the maintenance cost for heating and cooling is about $100 a month.

Last October, I visited the home of a Capital Well customer, Robert Wyatt, who lives just outside of Concord. The installation was under way; the home was being retrofitted after years with gas. Wyatt is in many ways the poster child for the kind of informed buyer Capital Well is counting on. He is a utility analyst for the New Hampshire Public Utilities Commission and has been following (and regulating) the gas industry for years.

"Five years ago, I was paying about $2,800 a year to heat my house with propane," he told me. "Today, this would cost $4,500, and the cost will rise with demand from emerging economies like India. Conservatively, I figure I'll be saving $2,250 a year with the new system. This means a seven-year payback. "

However quickly Capital Well moves from early adopters to mainstream customers like Wyatt, the company provides an unusually vivid case from which to draw some larger conclusions about the pace of diffusion of green technologies. The planet desperately needs them. But for any innovative product to spread quickly through an economy, it has to deliver a clear value proposition that both nests in an established technology and leverages the incentives in an established commercial ecosystem. Everybody would drive a hydrogen fuel cell vehicle if the fuel were a quarter the cost of gas, the car were only a couple thousand dollars more, and there were a hydrogen pump at every service station. But where are the incentives to build the car or produce the hydrogen if the local stations have no incentive to invest in distribution? Where is the incentive for service stations if no cars are on the road?

Scaling up geothermal across the nation is already plausible because of the ubiquity of companies like Capital Well, all of which have a strong need to get into this new and potentially immense market. Their current businesses are squeezed by mounting competition. They need to put their existing assets, both tangible and intangible, to new and more lucrative uses.

Nor is the technology fit only for residential buildings. There may be an even bigger market for medium-size commercial buildings that can afford to drive the heat pump with hybrid solar power mounted on the roof. Bob Grappone, owner of one of the state's biggest auto groups, retrofit one of his dealerships near Concord. Dartmouth College, in Hanover, has a geothermal system. So does the New Hampshire Institute of Art. And this is the market space where Capital Well is dreaming. "We are not quite set up for it now," Dan Grace says. "We have to qualify crews in commercial geothermal, a separate, specialized division. But if we see geothermal grow the way it is now, we can ramp up for it. That's where green really matters, too. I don't know if climate change is cyclical, but the big factories running on coal and gas—like in China—are putting more carbon in the atmosphere than our cars. And we want to cut down on imported oil so there will be more gas for our cars."

New Hampshire is a good test for the technology, because the winters are so harsh. If ground-source heat pumps can work here, they can work anywhere. But the farther south you go, the more exciting the efficiencies of geothermal become. The ground in New Jersey, for example, averages about 55 degrees. North Carolina, where the ground temperature is about 60 degrees, is a kind of reverse of New Hampshire, with long, humid summers, which require full-time air conditioning.

Terry Swain grew  up in the Lakes Region. He went to trade school, skipped college (his daughter, Lizy, is definitely not skipping it), and went to work building post-and-beam houses. Around 1980, his brother-in-law, Mike Dragon, got him a job on a well rig, and it was love at first sight. ("This was so rewarding, because the end product was so wonderful: I was bringing fresh water to your family.") The two finally started their own business, Capital Well, in 1986, and slowly built it to local prominence. The three Dragon boys and Dan Grace went to primary school together in Warner, then the brothers worked at Capital Well in a school-to-work program while still at Kearsarge Regional High School. Grace joined the brothers at the company right after graduation. The four young men hope to stick together and split equally whatever stake they get in the business.

They want to build on what Swain and Mike Dragon are bequeathing them, develop a regional brand (their first local television ads will air this year), enlarge the fleet, offer end-to-end service—water production and purification, geothermal heating and cooling—something of their own. "It's exciting to think they are building their futures," Swain says, speaking of the push into geothermal. "This is their generation's growth; since 2008, it is 10 times what it was."

Swain meets with the four aspiring future partners every Tuesday morning to go over the past week's jobs and analyze the business (not just the technical) side of how things might be improved. "Uncle Terry is always watching over us, to make sure that we understand how to improve, how to make money, and what to watch out for," says Greg. "He goes over the figures, where we're at, costs in every category, excavation to drilling pumps, warranty calls, all in pie charts. He is teaching us: The books are open." Grace—"not a brother, technically"—has been tasked with spearheading the geothermal strategy. He is equally humbled. "Of the 250 wells we drilled last year, 50 were for geothermal heating," he told me. "I am living and breathing this opportunity."

The maturing of  the geothermal industry has depended on the refinement of specialized components—compressors, heat exchangers, variable-speed-drive water pumps, smart regulators, grouters, etc.—that have to be produced in scale and distributed by advanced marketing networks. Ten years ago, small companies like Capital Well would not have had reliable and cost-efficient heat pumps to install. Many makers of engineered products have since gotten into the business: Bosch, Mitsubishi, Swedish and Chinese companies you haven't heard of, Carrier in the U.S., and also some smaller American companies, including Econar, based in Minnesota; WaterFurnace, in Indiana; and Advanced Geothermal Technology, in Pennsylvania.

All are assembling components from global supplier networks and designing heat pumps for local markets, much the way auto companies do. Eventually, a few will emerge as dominant world players, scaling up and cheapening the cost of the hardware considerably. Already, Bosch is advertising on television and Carrier on the Web. "We want great working relationships with the best supplier companies," Grace says, "and that doesn't mean the cheapest."

But Capital Well's dreams are grounded also in its younger people mastering technologies of a different kind, the ordinary peer-to-peer network technologies we take for granted by now but that allow them to coordinate efficiently among themselves and with contracting partners. Capital Well would not have survived to position itself for the new era if these young people had not been able to win bid after bid for new wells during hard times. And that has meant the sales force scheduling the equipment and communicating with subcontractors in what often seems a seamless, open conversation, so that everybody knows where each rig and van and person is at any hour—and exactly where to go next.

"Five years ago, I had a beeper," says Greg Dragon, who with his brother Adam runs the crews. "Somebody would leave a voice mail, I'd call back, prioritize—out-of-water calls always come first—and make up paperwork assignments for the day. We all now have Verizon Droids. So we stay in continual contact with each other through e-mail." A crew will call in, say, half an hour before finishing and be told where to go next. Greg and Adam use project-management software to triage. Every manager in the office can see, and suggest changes to, the schedule.

"It is all at our fingertips," Grace says. "And we have GPS to see where every vehicle is at all times, how fast they're going, in what direction, what's best to deploy, who to divert. Adam can e-mail me an address, and GPS will direct me to the exact location—and by the time I get there, all the specs from the job, all the geological information about the region, past wells, and so forth, are right on my smartphone. That's all just come available in the past three years. It has made coordination much easier and many, many times faster."

To work at  Capital Well, at least on the drill sites, you need a certain amount of physical strength, clearly, but what the network technology really enables is something like the playmaking ability of a basketball team. Every manager of the partnership, older and younger, sees the whole court. There is a division of labor, and getting to know the setup, operation, and limitations of the equipment is critical. But even more important is learning what you can expect from your colleagues: Who is best to troubleshoot a complicated pump spec, who knows how to run a line through a very old fieldstone foundation, who will just get out and dig if the backhoe threatens to damage the deck.

"I'm not looking for the strong guy," Swain says. "I'm looking for the player for tomorrow. I want employees to have knowledge to diversify; knowledge is power. The young guys joke when I say this, but they buy it." The chemistry among the employees, the desire to win, is the secret of the company's efficiency, a kind of intellectual capital that emerges only after a year or two if the company can retain the people it has trained. All the more reason for Swain and Mike Dragon to give the young people a horizon of innovation and succession to work toward. Recruiting good people who are as trainable and loyal as the four—that is the key to the company's future growth.

When one imagines the recovery of American manufacturing in the new green industries, it is far more realistic to think about thousands of companies like Capital Well taking on new people, producing holes, installing pipes and hardware, and programming pumps than to think about assembly lines producing, say, the pumps. There are nearly 12,000 well-drilling companies in the U.S. If every company hires 25 more people—Capital Well employed nearly 45 people when it was drilling 400 wells instead of 250—that's 300,000 well-paid "manufacturing" jobs, enough to reduce the unemployment rate by at least one point—and this is before the multiplier effect in employees' communities. In New Hampshire, competing geothermal installers such as Ultra Geothermal, Bill Wenzel Heating & Air Conditioning, and Dragin Geothermal are growing fast, with plenty of room for additional growth before they start suffering from the commoditization afflicting companies in well-drilling alone.

"All that's missing to drive this new industry is informed consumers," Swain says. "So we've got to get our employees talking about it, and this gets our customers talking about it." The company is still taking baby steps with its customers: seminars, the Capital Well website. But the real marketing is dozens of personal conversations with customers on-site.

"We just save people money," Grace says, "so how can we not embrace this? Especially with new construction, I always bring up geothermal. I'm so passionate that they have to have it! It starts as an appointment to bid on a well. Then we look deeper into the costs and benefits. We want people to make a rational decision." Swain, understandably, is more focused on established customers. After 25 years, there are a good many calls from early customers whose well pumps need replacing.

"We spend time with homeowners," Swain says. "If they have to put in a new well, we encourage them to drill deeper, to take advantage of low financing costs, to make a countercyclical investment. Even if they don't have the resources to retrofit their homes now, or they want to wait for their gas furnace to run out its useful life—whatever—we tell them they should prepare for tomorrow." A couple of homes in a small town put in a geothermal system, a couple of homeowners start to sing its praises, and the thing starts to snowball. "We all need water," Swain says. "We have to heat our homes. As soon as we start building new construction again, this thing will be huge."

Bernard Avishai is an adjunct professor of business at the Hebrew University of Jerusalem and a visiting professor of government at Dartmouth College. His most recent book, Promiscuous: "Portnoy's Complaint" and Our Doomed Pursuit of Happiness, will be published in April.