Value Networks and the Renewable Energy Industry: Part 3 in a Series

By Patrick DeCourcy

(Ed. Note: This post is an excerpt from a recent paper entitled 'Value Networks and the Renewable Energy Industry: Mapping a Pathway Towards Enhanced Technology Diffusion' which explores some of the challenges facing the renewable energy industry as it moves to become a greater part of the US energy infrastructure. This is Part 3 in a series, Part 1 can be found here, Part 2 can be found here.)

Mandates and Incentives

Public policy mandates and incentives seem like a great way to introduce a new technology to more people. New technologies are usually more expensive than their predecessors and the theory is that it sometimes takes an incentive for people to change their preferences for something less familiar. There are several public policy mandates and incentives surrounding renewable energies including tax breaks after purchases of targeted renewable technologies, subsidies for companies who are developing renewable energy technologies, public funds going to support "green jobs", and many others. [1]

Public policy mandates and incentives have parallels to the fossil fuel industry as this industry has been a long time beneficiary of government subsidies and incentives - most recently, to the tune of around $700 billion per year. [2] Even prior to the current day subsidies, there is evidence that the entire industry has been aided throughout its history through the use of targeted subsidies and incentives for energy exploration in specific geographical regions.  Again, the conventional wisdom would be that it makes sense for renewable energy entrant firms to try and lobby for the removal or shifting of all of these subsidies toward their form of energy and then incorporate this source of potential value as a permanent part of their value network. 

However, there is a major strategic issue with this, and it was articulated by Clayton Christiansen in The Innovator’s Dilemma 
“When would-be disruptors enter into existing value networks, they must adapt their business models to conform to the value network and therefore fail that disruption because they become co-opted." [3] My interpretation of this is that a value network should be uniquely built around the mechanics of advancing and diffusing the disruptive technology throughout the rapid advancement phase of the technology development cycle. It is clear that fossil fuel companies have already incorporated subsidies into their value network - and it is more likely that they are reliant on them to such a degree that they spend vast sums of money on lobbyists and political activities to keep them legally entrenched within public policy decision making circles. The website dirtyenergymoney.com [4] provides some transparency into the amount of fossil fuel sponsored lobbying and it is at a staggering level on both ideological sides of the political spectrum (Democrats and Republicans both benefit). 

This brings us back to the original point – when innovators try to enter into parts of existing value networks, they become co-opted and therefore their disruptive technology fails.  This is the danger in the inclusion of public policy subsidies into the renewable energy value network.  It is a realm that is already entrenched in the value network of established fossil fuel companies.  The main goal of all renewable energy entrant firms should be to advance their technologies in terms of efficiency, affordability, and marketing.  These triggers will push their technology from the early adopter diffusion phase (and possibly out of the chasm of that routinely exists in this phase) and into the early majority phase.
Relying on  subsidies and incentives is going to set up scenarios that will not aid in this effort.  As an entrant firm trying to promote an innovative technology, it is critically important to be able to plan activities around a mission statement and perform project due diligence with a particular focus on risk management and budgeting accuracy.  Trying to account for a potential public policy subsidy or incentive is difficult, and taking steps to pool limited resources to lobby or influence others to give your technology an incentive is a distraction that entrant firms should not waste time with.
Subsidies and incentives for renewable technologies do not always have the intended effect that was envisioned when they were championed. For example, the corn-ethanol subsidy was designed to lower the cost of energy and help diversify the energy supply away from fossil fuels during a time period where crude oil prices had seemed to spike to very high levels. However, the subsidy has not helped much with lowering fuel costs or increasing fuel efficiency and since corn is a major constituent in many derivatives of the food supply, it drove the cost of food up an estimated $15 billion in the USA alone in 2008. [5] Increases in food prices have led to riots in poor countries, strikes in developing countries [6], and make it more difficult for consumers to spend money in other areas – such as renewable technologies. According to Reuters, even former Vice President and Nobel Laureate Al Gore - a longtime champion of renewable technologies and strategies for diffusing them throughout the planet– stated that these ethanol subsidies have not been helpful for consumers and were much more about domestic politics than advancing renewable technologies: [7]
"It is not a good policy to have these massive subsidies for (U.S.) first generation ethanol," said Gore, speaking at a green energy business conference in Athens sponsored by Marfin Popular Bank.
"First generation ethanol I think was a mistake. The energy conversion ratios are at best very small."
"It's hard once such a programme is put in place to deal with the lobbies that keep it going."
He explained his own support for the original programme on his presidential ambitions.
"One of the reasons I made that mistake is that I paid particular attentiont to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president."
Another problem is that if/when these subsidies are taken away; can the other parts of the value network and economic drivers support profitibility in these industries? Could corn-based ethanol and its use in fuels make economic sense for the producer and consumers without the subsidies? Some advocates for the subsidies say yes, and some disagree and even purport than consumers will benefit in several ways from a removal of the subsidies and incentives for corn-ethanol. [8]
Europe - specifically the country of Spain - is a good case study to examine for the effectiveness of subsidies and incentives on renewable energy diffusion. Since 1997, Spain has engaged in serious public policy efforts to curb fossil fuel use and force consumers/businesses to start using renewable energy technologies. Here are some of the early results from these efforts as reported in the Canada Free Press: [9]'[10]
·     “Spain’s requires that 20 percent of its electricity production be from renewable energy by 2010. The government’s Renewable Energy Plan expects to have 20,155 megawatts of wind capacity by then. In 2008, wind energy provided 10.2 percent of the country’s electric consumption at a price per kilowatt hour that was almost 50 percent higher than wind’s generating price 10 years prior, partly owing to high premiums in the regulated rates for renewable energy and the requirement that all renewable energy be purchased by electricity retailers. Spain provided both regulated rates and direct incentives to attract investment and meet its renewable policy goals.” [9]

·     “A Spanish study found that Spain’s “green jobs” agenda resulted in job losses elsewhere in the country’s economy.  For each “green” megawatt installed, 5.28 jobs on average were lost in the Spanish economy as an opportunity cost; for each megawatt of wind energy installed, 4.27 jobs were lost; and for each megawatt of solar installed, 12.7 jobs were lost.  Although solar energy may appear to employ many workers in the plant’s construction, in reality it consumes a great amount of capital that would have created many more jobs in other parts of the economy. The study also found that 9 out of 10 jobs in the renewable industry were temporary." [9]

It might behoove innovators at entrant firms to keep the ethical considerations of their decisions in light.  Subsidies may have yielded some benefits and profitability by forcing people to use disruptive renewable energy technologies.  But it is likely that the technology was not economically feasible, due to the relatively early position it occupies on the S-curve and lack of overall efficiency, but since it was forced on consumers, it ended up costing them and the economies they work in much more than was anticipated. 

From a marketing perspective, consumers were forced to pay for technologies which were not advanced enough to offer the efficiencies of the fossil fuels.  This does not cast the renewable industry in a great light and it is nearly impossible to craft this into a coherent marketing pitch to consumers.  Also, are innovators and executives at entrant renewable energy firms prepared to know that their lobbying for subsidies and incentives for an immature technology may cause many people outside of their industry to lose their jobs and consumers to be price gouged? 

Innovators at entrant firms need to realize it is critical not to include subsidies and incentives as part of their value network.  Disruptive technologies in the global energy market must make economic sense on its own merits and based on the value it can add to consumers above that which already exists in the energy market.  A reliance on subsidies will ultimately hurt the diffusion of renewable energies by rigging the business model to include subsidies as a source of value, but when the subsidies are removed through political regime changes or go away by other public policy means, the financing and economics of the technology cannot stand on its own economic merits and thus the diffusion is halted.

Subsidies are not a bad thing in and of themselves, and they are well intentioned. The argument being made here is that they should not be relied upon as part of a value network. The value network shoudl be specific to fuel the economic and innovative means for diffusing the disruptive technology to more consumers. Furthermore, there have been plenty of disruptive technologies which have had outstanding diffusion profiles with no public policy incentives at all. For example, what public policy incentives exist for iPhone or iPad? These subsidies and incentives are a distraction to the innovative entrant firm. Ultimately they aren't needed for the development of a well thought out and envisioned disruptive technology. Unfortunately, entrant firms do seem to be somewhat distracted with competing against the fossil fuel industry in terms of lobbying and trying to influence public policy. [11]

Continue reading here.

[1] "Renewable Energy Commercialization." Wikipedia, the Free Encyclopedia. Web. 11 Dec. 2010. .
[2] Boone, Cathy. "Fat Subsidies for Fossil Fuels | The Applied Materials Blog." Blogs | The Applied Materials Blog. 09 Nov. 2010. Web. 12 Dec. 2010. .
[3] Christensen, Clayton M. The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Boston, MA: Harvard Business School, 1997. Print.
[4] Dirty Energy Money | Oil Change International. Web. 12 Dec. 2010. .
[5] Alexander, Corrine, and Chris Hurt. Purdue Extension - Biofuels. Biofuels and Their Impact on Food Prices. Purdue University. Web. 08 Dec. 2010. .
[6] "World Bank Chief: Biofuels Boosting Food Prices : NPR." NPR : National Public Radio : News & Analysis, World, US, Music & Arts : NPR. 11 Apr. 2008. Web. 12 Dec. 2010. .
[7] Wynn, Gerard. "U.S. Corn Ethanol Was Not a Good Policy-Gore| Energy & Oil| Reuters." Reuters.com. 22 Nov. 2010. Web. 12 Dec. 2010. .
[8] Velasco, Joel. "End of Ethanol Tariff & Subsidy Doesn't Mean the End of U.S. Ethanol." The Huffington Post. 03 Dec. 2010. Web. 12 Dec. 2010. .
[9] "Myths of Cap and Trade and Clean Energy Policies." Canada Free Press. Institute for Energy Research, 11 May 2010. Web. 07 Dec. 2010. .
[10] Alvarez, Gabriel Alzada, Raquel Merino Jara, and Juan R. Julian. Study of the Effects on Employment of Public Aid to Renewable Energy Sources. Rep. Universidad Rey Juan Carlos, Mar. 2009. Web. 29 Nov. 2010. .
[11] Marshall, Christa. "Climate and Energy Issues Send Hordes to K Street - NYTimes.com." The New York Times - Breaking News, World News & Multimedia. 10 Feb. 2010. Web. 12 Dec. 2010. .

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