The kWh/kg Trap: Why Indoor Agriculture's Favorite Metric Is Destroying Capital

The kWh/kg Trap: Why Indoor Agriculture's Favorite Metric Is Destroying Capital

Executive Summary

The indoor agriculture industry has absorbed more than $14 billion in capital over the past six years. During that same period, at least 28 vertical farming companies ceased operations or declared bankruptcy in 2024 alone. Bowery Farming, once valued at $2.3 billion, shut down. Plenty, backed by nearly $1 billion from investors including Jeff Bezos and Eric Schmidt, filed for bankruptcy in March 2025. AeroFarms, a pioneer that raised over $300 million, went through Chapter 11 in 2023.

A reasonable question follows: if LED lighting efficacy has improved by more than 35% above the most efficient non-LED alternative, and if average fixture efficacy now exceeds 3.0 µmol/J for top-tier products, why have the most well-funded operations in the sector failed?

The answer is not technical. It is analytical. The industry's primary performance metric—kilowatt-hours per kilogram of output—measures the wrong thing. It measures biological conversion efficiency. It does not measure financial viability.

Why kWh/kg Became the Dominant Metric

The metric has an intuitive logic. Energy is the single largest variable cost in indoor production, accounting for roughly 25 to 33 percent of total operating costs. Lighting alone represents approximately 65 percent of total power consumption in a vertical farm, with climate control accounting for another 30 percent. Given this cost structure, it makes sense to measure how efficiently energy converts into harvested output.

And kWh/kg does measure this well. It captures the photosynthetic efficiency of a production system—how many kilowatt-hours are consumed per kilogram of biomass produced. Globally, the average energy use for indoor agriculture is approximately 38.8 kWh per kilogram of produce, compared to 5.4 kWh/kg for traditional greenhouses. Reducing this figure is a legitimate engineering objective.

What kWh/kg Ignores

The problem is not what the metric measures. It is what it does not measure.

kWh/kg treats every kilogram of output as equivalent. A kilogram of butterhead lettuce and a kilogram of saffron are weighted identically. The metric captures mass. It does not capture value. This introduces a systematic bias toward high-biomass, fast-growing crops—precisely because they produce the most kilograms per unit of energy.

This is why more than 90 percent of vertical farming pitch decks propose growing leafy greens. Leafy greens look efficient on a kWh/kg basis. They grow fast, produce substantial biomass, and cycle quickly. But the North American leafy greens market, while large at approximately $70 billion in 2025, is characterized by intense competition, thin margins, and commodity-level pricing. It is a volume business competing against field-grown product.

Meanwhile, the global fresh herbs market is projected to grow from $6.4 billion in 2025 to $16.0 billion by 2035 at a CAGR of 9.54%. Specialty herbs and high-value crops generate significantly higher revenue per kilogram, but they often grow more slowly, produce less biomass per cycle, and therefore appear less efficient on a kWh/kg basis.

This is the biomass bias. The metric steers capital toward crops that optimize mass rather than margin.

Lighting Efficiency Is Not Lighting Strategy

A parallel error occurs with fixture-level thinking. The industry has made meaningful progress in LED efficacy. In the early 2010s, standard high-pressure sodium lamps operated at roughly 0.94 µmol/J for 440-watt configurations. Today, the DLC's qualified product list includes fixtures exceeding 3.19 µmol/J. This represents a threefold improvement in photon conversion efficiency.

Yet this improvement in µmol/J has not translated into industry-wide profitability. The reason is that fixture efficacy measures how efficiently a device converts electricity into photons. It does not dictate how those photons are deployed across growth cycles, crop varieties, photoperiod strategies, or revenue-optimized light recipes.

A less efficient fixture, deployed with precision on a higher-margin crop at the correct light intensity for that cultivar, can generate more revenue per kWh than the highest-efficacy fixture saturating a commodity crop beyond its point of economic return. Lighting efficiency and lighting strategy are distinct competencies. The industry has invested heavily in the former while underinvesting in the latter.

Industry Capital Patterns: A Diagnosis

The investment trajectory tells a clear story. Indoor farming startups raised approximately $873 million between 2010 and 2019. Capital accelerated sharply: $1.6 billion was raised in 2021 alone, and the sector reached approximately $2.4 billion in 2022. Then the correction arrived. Funding for novel farming systems plummeted 75 to 80 percent, falling from roughly $2.8 billion in 2022 to just $0.68 billion in 2023. By 2025, indoor farming funding had settled to approximately $290 million in disclosed capital.

The failures that emerged were not energy failures. Bowery Farming raised over $700 million and was valued at $2.3 billion. Plenty raised nearly $1 billion. AppHarvest raised over $700 million and went public at a $1 billion valuation. AeroFarms raised more than $300 million.

These companies had access to the best lighting technology available. Their failures were capital allocation failures. They scaled infrastructure before proving unit economics. They pursued facility size as a competitive advantage rather than margin density. They optimized for the metrics their investors understood—throughput, biomass, energy efficiency—rather than the metrics that determine business survival: revenue per square meter, gross margin per kWh, and capital payback period.

As the current CEO of AeroFarms noted after guiding the company through its bankruptcy restructuring: the company had been "a tech company first, not a farming company." The missing ingredient, she concluded, was "operational excellence"—experience in running a vegetable production facility.

Case Study: Sustainabite Fresh Farms

Sustainabite Fresh Farms operates a 40-foot high-cube container-based growing system. Energy costs represent roughly 10% of revenue. The operation achieves approximately !40 percent net contribution margin. It competes at import-equivalent shelf price without relying on premium pricing.

The operation does not use the most expensive or highest-efficacy lighting available. It does not optimize for kWh/kg. Instead, it optimizes for revenue density per unit of growing space, margin per unit of energy consumed, and sell-through reliability.

On a pure kWh/kg basis, Sustainabite's crop selection might appear less efficient than a facility maximizing lettuce biomass throughput. But Sustainabite is profitable. It generates positive cash flow in a sector where operations that raised hundreds of millions of dollars could not.

This is not presented as a universal model. It is presented as evidence that the evaluation framework matters. When the metric changes from biological efficiency to financial efficiency, the strategic calculus changes with it. Crop selection changes. Lighting strategy changes. Capital allocation changes.

A Better Evaluation Framework

For investors and operators evaluating indoor agriculture, the following metrics provide a more complete picture:

Revenue Metrics:

  • Revenue per kWh ($/kWh)

  • Revenue per m² per year ($/m²/yr)

Efficiency Metrics:

  • Energy cost as a percentage of revenue

  • Sellable yield as a percentage of gross yield

Capital Metrics:

  • CAPEX per dollar of annual revenue

  • Capital payback period

These metrics do not replace kWh/kg. They contextualize it. kWh/kg tells you how efficiently a system converts energy into biomass. Revenue per kWh tells you how efficiently that biomass converts into income. Gross margin per kWh tells you how much of that income you retain. CAPEX per dollar of revenue tells you how much capital was required to generate it.

The hierarchy matters. An operation that produces 10 kWh/kg of a crop selling at $2/kg generates $0.20 per kWh. An operation that produces 25 kWh/kg of a crop selling at $12/kg generates $0.48 per kWh. The second operation looks worse on kWh/kg. It performs better on every financial metric that matters.

Closing: Optimizing the Right Metric

The indoor agriculture industry does not have an energy problem. LED efficacy has tripled. HVAC integration has improved. Renewable energy integration is advancing. The industry has a measurement problem.

When the dominant metric measures biological conversion, capital flows toward biological optimization. When the dominant metric measures financial return, capital flows toward margin density, distribution control, market discipline, and sell-through reliability.

Vertical farming is agriculture with technology. It is not technology with plants. The operators who survive and scale will be those who measure what matters: not how many kilograms they produce per kilowatt-hour, but how many dollars of margin they generate per unit of capital deployed.

The metric you optimize is the future you select.
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References

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Author Bio: Ranjot Singh Dhaliwal is the founder of Sustainabite Fresh Farms Ltd., operating vertical tower hydroponic systems in Surrey, BC, Canada. The company specializes in pesticide-free basil and holy basil production for retail markets across British Columbia.

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