The Energy Firm of the Future
The combined challenge of providing affordable energy to the world and reducing carbon and other GHG emissions is a key challenge for the 21st Century. I believe that the challenge needs to be met on all fronts, and by all stakeholders: governments, communities, and businesses. I innately believe that economics need to be sound hence business will be at the core of meeting the challenge. While governments, communities, and other organizations will be involved and have roles to play, it is the Energy Firm of the Future that will be the engine of ingenuity, investment, and execution to deliver the transition.
In this blog I offer some ideas on the key attributes required by the Energy Firm of the Future (EFF) to meet this profound challenge. This article captures thoughts from energy transition and energy company discussions I have had and observed over the last few months involving a large number of contributors, with Hans Hyde deserving a particular mention. However, I am solely responsible for this take on the Energy Firm of the Future.
Profit and Purpose
First of all, the EFF needs to sustainable financially. In other words, it needs to make a profit. How much profit depends on the nature and needs of the investors and/or owners of the EFF, as well of course the market including the performance of competitors. EFFs probably are better as public companies, to allow “ordinary” investors to own stock, as well as institutional investors. In addition public ownership provides greater transparency in financial reporting. EFFs could be anything large market cap nationals providing steady dividend yield to local co-operatives returning any profit to customers/owners.
More importantly EFFs must have clear purpose, that is understood and embraced by all stakeholders from investors through employees to customers. An EFF’s purpose will have at its root the following: “We gather and supply clean, affordable and reliable energy to X”. X is a group of customers, large or small, focussed or geographically diverse. I have a pragmatic view of the energy transition that allows for consumption of fossil fuels but with increased carbon capture and sequestration (CCS). I also agree with the view that non-energy sector GHG emissions will need CCS to be eliminated. Hence I have used the word “clean” in the mission statement. The energy needs to be affordable both to individuals and to economies. We only have to look at the record of oil price versus global economic growth to see the effects of expensive energy on economies. I have added the word “reliable” to both reflect the short terms needs of homes and businesses to keep the lights on regardless of the season or the time of day. EFFs will be mitigating intermittency issues in energy supply and finding ways to affordably store and level load energy. EFFs will be finding solutions to customer to use less energy. Much less energy. In the long term, an energy company needs to be thinking years ahead in the energy transition so that changing energy demands continue to be met in a predictable and reliable way.
There be more to the company’s the visions than just that, for example an EFF might have be focused on growing a market share of one particular energy source, or offers services to reduce the energy needs or carbon footprints of their customers. Deeply purposeful, profitable and enduring companies are characterized by a profound clarity of their values/passions, as well as their key capabilities and the key aspects of their “economic engine”. My EFF will likely be passionate about safety or care for people and the environment, particularly given higher operating risks to which it might be exposed. Similarly traits of innovation and excellence or continuous improvement are important cultural components of the EEF. EFF’s will need precision about their profit model, and the key cogs in the machine that drive financial performance. For example, in past decades oil and gas companies needed to focus on volumes resulting from risk taken, but now increasingly are margin businesses as we experience the peak of affordable oil. Old and new capabilities will be important for the EFF. For example, the traditional prowess of commercial contracts for power producers, or large project inception and execution that the oil & gas firms have excelled at, are some of the old skills needed for the future. Clearly new disciplines such as big data and the Internet of Things will be some of the new tools of integration and performance delivery.
Segments in supply and demand for the Energy Firm of the Future
Focus and Integration
The diagram above is intended to illustrate the supply and demand of energy in a simple way. On the supply side I envisage EFFs being involved in multiple sectors. As I confessed above, I believe that pragmatic energy transitions will be accomplished by firms gathering or contracting several forms of energy. There’s still room for EFFs to be focused in entirely one sector of supply, particularly I think for local EFFs that are dealing with a restricted customer base. For example, Cypress Creek are a company focused on providing solar solutions to individual communities across the United States. At the other end of the spectrum, are the “majors” who I suggest will need to break out from traditional sectors of supply to integrate multiple fuel solutions. Examples of this behavior include NextEra in their recognition of natural gas as a key fuel in the electricity generation portfolio (in addition to strong solar and wind components). I suspect that we will witness major, multi-national companies also continue to operate as integrators in both the supply and demand sides of the energy spectrum and expect the bigger companies from traditional supply and demand sectors to diversify across market segments. A recent example of this is Shell, and oil and gas major IOC, moving into energy storage and innovative residential power solutions with the purpose of Sonnen.
There is also opportunity for EFFs to play in very focused geographic markets such as smaller countries, or states in large countries in the US. One example of this is California, which is currently a hotbed of dispute between traditional oil and gas one one side - and the state is well endowed with these resources, and renewables on the other side. I have suggested before that there is an opportunity for a bigger company, with a commitment to the energy transition and the capabilities to deliver to step into the middle ground. Similar challenges and opportunities appear to be present in Ireland and Britain, as well as many other countries and regions around the world. Local EFFs could undertake these challenges for the good of all stakeholders including both investors and customers. Major multi-national energy companies could also present themselves as local EFFs supporting the delivering the energy needs of a country and that countries plan for emissions reduction.
On the supply side, there is a diversity of energy consumers and hence potential emitters of carbon and other pollutants. Most experts conclude that greater electrification is a pre-requisite for carbon emissions reduction. Most also agree that we need to be increasingly much more efficient with our energy usage. Hence some EFFs will benefit from be entirely focused in one or two demand sectors - Tesla are an obvious example in taking on residential solar and light vehicle transportation. Other EFFs, particularly the large internationals, or the ones focused on being a local EFF, will need to invest in multiple demand sectors if they are truly to make a difference to the energy and emission needs of the entity. For many EFFs, involvement in different sectors will allow the mixture of several revenue streams from different profit centers, providing resilience to the business.
Innovation and Delivery
EFFs will need to be able to both deliver of commitments to customers who rely on them for their energy needs, but also be able to have space to innovate, experiment and thoughtfully pursue new energy solutions. These potentially conflicting demands need to be carefully managed, depending on the EFF’s balance sheet and income projections. Larger EFFs may have more bandwidth to take more risk in new innovations in energy, and a variety of business structures to finance new breakthrough projects will be needed. Smaller EFFs will need to be more selective in their experimentation, but partnerships and joint ventures should offer the space to innovate. Regardless of the means of experimentation, EFFs need to be involved in the leading edge of technology change, particularly as it affects customers and suppliers attitudes and behaviors. The energy transition is about culture change as much as it is technology.
Deep meaning, not virtue signaling, or excuses
My final point about EFFs in this piece returns to emphasize the first point about purpose. As Simon Sinek amongst others has pointed out, people need companies and products that they believe in. That belief starts with a profound resonance of “why” the company does what it does. Hence everything single action an EFF takes needs to be absolutely consistent with its purpose/mission. Actions that are not aligned to purpose, but might be well intended, are likely to “glance off” and actually turn people off. I believe this is even more important now than ever. We need companies we can trust in the energy transition.
Footnote: I am looking for opportunities to contribute to organizations that have ambition to be an EFF. Hence I welcome comments ranging from other ideas or alternative suggestions on the attributes of the EFF. I’d like to periodically update this blog with those ideas and comments to improve this “blue print” for the Energy Firm of the Future.