Wanted: Business Models For The Energy Future
The energy world is changing fast. Investments into renewable energy are outpacing investments into conventional energy. The incumbents, unused to this pace of change and tied down by large asset bases and long-term investment strategies, are struggling.
The first to be hit were the utilities in developed countries with a high share of renewables in the electricity mix. But other industries relying on conventional energy sources are now feeling the heat, too: Large electrical component manufacturers like GE, Siemens, and ABB are scrambling to maintain their central positions in the electricity industry. Oil companies, for decades the unassailable behemoths of the global economy, have been underperforming for investors over the past few years as the risks, costs, and complexities of their business has risen sharply. They struggle to replace oil resources at competitive rates. (Here is an excellent analysis by BCG on this: “Big Oil’s Road to Reinvention.”) In addition, as the recent Exxon case shows, they see climate change as an existential threat — to their business, rather than to mankind.
And now, even car companies are in trouble. Not only because of the vast diesel scam that engulfs many more manufacturers aside from VW — the result of relentless pressure from environmental standards. They also, finally, seem to be concerned about disruptive innovation from electric mobility, like Tesla or the Google car (see this excellent recent article).
The overall business environment is clearly shifting towards a clean energy future. Just a couple of days ago, the ambitious Paris Climate Agreement was signed by 177 countries. Ever more investors are making sustainability a part of their strategy, channelling trillions of dollars in greener directions. The UN-backed Principles of Responsible Investing initiative, for instance, which provides a minimum code of conduct, has signatories managing $59 trillion — or half of global asset wealth (see article).
While some investors do this for environmental concerns, most do it out of sound business risk assessment: old energy has a big “licence to operate” problem. In response, companies are beginning to improve their sustainability footprint and their way of doing business. Some adjust their product portfolios and corporate strategies.
In addition, political regulations are more favourable to resource efficiency and renewables in more countries than ever before. As new energy technologies are becoming ever more competitive, and politicians, consumers, and businesses see this as a great opportunity rather than as a threat, regulatory support will likely grow. This trend has not been dampened even by the sudden and huge fall in oil prices.
Yet, it seems really difficult to earn money with this monumental, global energy transition. Why is this the case?
The trouble is, the global energy transition is threatening conventional energy markets without yet having created functioning new markets. Both the risk-taking, disrupting pioneers as well as the asset-heavy, path-dependent incumbents are often at a loss. “We haven’t totally figured out exactly what the business models are going to look like — who wins, who loses,” says Jason Bordoff, director of the Center on Global Energy Policy a Columbia University. So where is the market stuck?
- Cost: Renewables and energy efficiency might just not be cheap enough yet to radically disrupt the way people use and buy energy. Storage at a fourth of today’s cost would be a game changer. Solar, while competitive with grid power in many countries, still needs to be much cheaper to really become an unbeatable option (see, e.g., the “value of solar” argument put forward by Shayle Kann and Varun Sivaram). The same is true for energy efficiency solutions. The new energy world will have different structures from the current one (more distributed, smarter, more versatile, etc). There is a “hassle factor” as societies, economies, and consumers need to change their way of operating. They will only do that and overcome their inertia if the new option is much more attractive than the old. How much is “much more?” That is anyone’s guess. Maxine Ghavi of ABB once suggested that new options need to be at least 30% cheaper at the same or better functionality.
- Size: New energy is still small in size compared to old energy. An oil company can spend tens of billions of dollars on developing a new oilfield. A utility can spend billions on a new large coal, gas, hydro, or nuclear power station. Renewables investments are still counted in millions. Tesla sells tens of thousands of cars. GM, VW, or Toyota alone sell millions. Why does that matter? Because it makes it almost impossible for the old energy players to change toward new energy. They are simply too large. They employ hundreds of thousands of people and have management structures and corporate cultures designed for large, long-term investments. They would need to become much smaller to fit through the narrow doors leading to future growth. And who wants to become smaller?
- Differentiation and technology: Renewables and power grids are surprisingly conservative industries. New technologies are difficult to finance. Solar is the best example: PV technology, which dominates the market, has become a commodity. Successfully developing solar projects is now a financing game. Along the entire value chain, there are few unique selling propositions that could protect margins. As a result, very few people actually make money.
I think it takes great strategic courage — and at scale — to be a winner of the global energy transition. Existing, large energy companies will find it difficult to succeed. They must risk a lot (yet, what is their alternative?) and their shareholders are typically not venture capitalists but seek stable, regular returns.
There are investors ready to bet on change-makers: new technology, new platforms and infrastructure, and customer access. In a fast-changing world, who knows the many ways in which this can eventually be capitalised? This approach can work, as it seems in the case of Tesla (or earlier in other technology companies like Google, Facebook, etc.), and pay off enormously. But it might also not pay off, as in the case of SunEdison or Abengoa or Q-Cells.
The challenge for the new disruptors is that: Firstly, it might take too long for markets to change and investments to generate a return. Companies and their investors might run out of cash and patience. Secondly, the early movers might not be the winners. While their spending on educating customers, fighting regulations, or building new organisations is essential for the overall market development, it might not pay back for them. Many of the companies that will really benefit from the revolution in the way we generate and use energy are probably not around yet.
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Word salad. The way you tell if a revolution is in track is to look at relative growth rates and price trends. Wind, solar, and EV batteries – the three key technologies – are firmly on track. As for companies, some win, others lose, both on the incumbent side and the innovation side – though overall incumbents lose out to innovstors. It was like that in railroads, electricity, computers, telecommunications, you name it.
OK can you at least be honest. Why would you parrot coals/oils talking point on cost, without including. FF is cheaper because of a licence to pollute and kill, and massive government support. Until this changes RE is working at a cost disadvantage. Harvard puts the cost of coal electric in USA at 3x-5x it’s current rate if you just include the health impact. That need to be reflected in the cost so that the market can do the correct adjustment.
We are also talking about comparing already paid for coal plants output to not yet built renewables. The only fossil plants being built are gas.
Good point. Thanks Matt. Pricing in the externalities of fossil fuels would be a game changer, too. But do you see that happening anytime soon?
We all need to pound the facts into people when we get the opportunity.
Conservatives put lowering government spending high on their list. As we reduce fossil fuel use we cut government spending on health costs related to coal and oil.
Also, as we reduce our dependency on oil we lower the need to keep a military presence in the Middle Eastern oil area. We could cut military spending as well.
Parents care a lot about their children’s health. The external cost of oil and coal includes the cost of their children being sick.
Find other messages. Ways in which the external costs impact different groups of people. Make them aware how the external costs take money out of their pockets. Doing so you start building the awareness needed for the general public to start requesting things like carbon prices.
Do coal plants lower property values?
Does exposure to car pollution decrease business on busy streets?
Is coal pollution causing people to have to repaint their houses more frequently?
I don’t know the answers to those questions but they might be worth researching. More arrows for the quiver….
Thank you Bob.
Those questions need answering.
Past financial paradigms have to change to benefit the rate payer and his/her monthly bill.
The net metering wars are social battles.
We bailed out the too big to fail.
How bought someone allowing the working and middles class to invest in themselves.
Avoided costs to monopolies need to be quantified.
The externalities and avoided costs are not being figured for the benefit of the ratepayer.
Thank you for making that point. The only consideration continues to be ROI for the investors.
Ratepayers are as much a partner as is the initial investor.
No business is sustainable without a customer.
You want a “Business Models For The Energy Future”?
RE has upfront infrastructure costs and then you harvest free energy with minimal maintenance costs. For many decades after the capital cost is recouped.
You think people are going to want to pay through the nose for energy that is essentially free? How can this not all lead inexorably to a publicly-owned non profit utility that eventually stops sending out usage bills and gets absorbed into basic governmental overhead, like a Police, Fire, or Parks department or a Bureau of Standards, the USDA, or the CDC?
Bingo Roger.
Society benefits.
What a concept.
“Apple’s market cap is now larger than General Electric, Wal-Mart,
General Motors and McDonald’s combined. If you add up the market caps of
these four behemoths, you still have $30 billion left over, when
comparing them to Apple.”
So Apple has now entered the electric car market as well.
The phrase in the article I most like was “existential threat”. Nice. The carbon dinosaurs don’t want to die. And apparently the humans on the planet don’t want to die either. And there is a nice crossover between the people who work for the dinosaurs and the people who live on the planet. Talk about an existential dilemma.
The U.S. supreme court’s ruling in support of compensating consumers for using Demand Response technology seems to bode well for energy storage business models. Water heaters and air conditioning are more often used as examples when talking about demand response, but battery energy storage seems to fall squarely under the definition of peak shifting demand response technology. Offering batteries to residential and commercial interests with shared access for utilities, or possibly a third party “new business model” decentralized microgrid, could be a game changer.
http://cleantechnica.com/2015/12/09/tesla-powerwall-offered-to-vermont-utility-customers-for-free/
I’ve recently begun working as a solar installer and part time sale associate for a local installation company in Illinois. For business’s and homeowners who are interested in batteries, I would like to have options to lease or finance a battery system, with a form of compensation through either a real time pricing net metering type of energy market or a payment system giving the utility access to distributed energy storage.
Any thoughts or recent news on the Vermont pilot project is appreciated 🙂
The business model for the renewable energy future is completely different from the fossil fuel business model. So different, actually, that to refer to both of them as “energy” businesses is misleading and confusing.
The old model is a FUEL business, based on finding, extracting, processing, transporting, selling and burning a limited, increasingly scarce and costly supply of FUEL.
The new model doesn’t have anything to do with FUEL, in fact it makes fuel obsolete because the energy sources are free, abundant, ubiquitous and inexhaustible. Instead, it is a TECHNOLOGY business, based on developing, manufacturing and selling the rapidly improving, and increasingly cheap, TECHNOLOGY for harvesting and storing that free energy.
It’s a business model that looks a lot more like the computer, telecommunications, networking and consumer electronics industries than the fossil fuel industry.
Nice points. The FF business model is 19th Century but it’s attraction is that it puts the power, literally and figuratively, in the hands of a few. RE is distributed and helps make individuals and communities resilient and self-sufficient.
I think John Karry is foreign fairs minister not vice president.
Correct. John Kerry is Secretary of State (the equivalent of Foreign Affairs Minister in other countries). Joe Biden is Vice President.
It’s true that it’s very hard to invest in sectors like solar, because the “winner” companies may be ones which don’t exist yet; the existing pioneer companies may go bust and lose all their stockholders’ money even if their products take over. (Consider A123.) This seems to be the main point of the article.