Doing business in a low-carbon world
A carbon-constrained future will demand power and utility companies completely rethink the way they do business. But opportunities abound for those prepared to innovate. Arnaud Bouillé reports.
As regulations tighten and stakeholders demand that companies do more to mitigate their environmental impact, leaders of the world’s power and utility (P&U) companies are asking themselves challenging questions about their operations, strategy and reporting mechanisms.
What will utilities need to do to adapt to the low-carbon economy?
Three main issues will focus the attention of P&U companies striving for growth in a low-carbon economy:
1. Changing the mindset. The impacts of climate change, particularly restrictions regarding emissions, will see the sector shift from a generation-led environment to one driven by demand. This has implications across the business:
- Generation will shift from large, centralized power plants toward smaller, decentralized renewable generation sources
- Grid infrastructure will need to be developed and managed accordingly, driving new capital programs and to ensure grid stability
This will drive demand management solutions, the use of smart meters and an empowered consumer who will be expected to take an active role in generating power and changing their consumption patterns.
2. Organizational innovation. P&U companies must engage in innovative thinking to overcome the challenges of increased regulation and develop services, products and investments appropriate for a carbon-constrained world.
3. Capital structure and risk management. P&U companies are likely to be challenged by the cost of shutting down large, unviable assets while at the same time investing in renewable sources of power generation.
They will need to look for new ways to finance infrastructure upgrades through joint ventures with financial institutions.
Early movers embrace change
P&U companies that take a proactive approach to overcoming these changes can reap a strong competitive advantage:
- They will directly benefit through the cost savings of carbon-efficient practices
- They will have the opportunity to create a strong brand differentiation
- They may build a better relationship with customers and other stakeholders and create sustainable value going forward
For example, Consolidated Edison Company (Con Edison) – one of the largest investor-owned energy companies in the US – owns seven power plants, but has decided to make the transition to renewable power generation.
- The company has used energy efficiency initiatives to help customers reduce electricity consumption.
- In 2008, a subsidiary of Con Edison sold all its fossil-powered generating assets.
- While Con Edison has obligatory carbon reduction targets under the Regional Greenhouse Gas Initiative (RGGI), it is setting its own goal of a 40% reduction of its direct emissions by 2020.
- Management is incentivized through key performance indicators and monetary rewards to achieve these targets.
- The company actively lobbies the federal government for a federal carbon scheme that covers all sectors, whether under a cap-and-trade system or a carbon tax.
Denmark’s DONG Energy is also shifting its generation mix. Traditionally an oil and gas company, DONG Energy decided to move to a generation mix sourced mostly from renewable energy, particularly wind power. Now the world’s largest offshore wind developer and operator, DONG Energy partners with large institutional and private investors to fund its projects.
The company recently announced that it could cut the costs of offshore wind farms to well below UK Government targets by 2020.1
Lack of regulatory clarity
While these examples show how P&U companies can turn carbon constraints into a business opportunity, they also highlight the risks inherent in any fundamental shift in generation mix.
The long-term success of any large investment in renewable energy sources is still dependent on the policies and decisions of governments and regulators.
It is therefore critical that authorities create trust and stability in the market as well as incentives for long-term investments. P&U companies must also manage the large administrative burden that comes with carbon regulations. While this is a challenge, a proactive approach to compliance can also bring opportunities.
Organizations are likely to benefit from investing time and effort in:
- Streamlining their compliance process
- Lobbying the appropriate authorities
- Developing a corporate carbon management strategy
Winners and losers
P&U companies that do not change their traditional and conservative mindset will find it difficult to overcome the organizational and risk profile challenges presented by regulation.
Companies that take a proactive approach to these risks will find they also offer numerous opportunities that go beyond cost saving:
- Changing consumer behavior and regulations may stimulate new product development and open up new markets
- Adaptation to the physical impact of global warming will require the development of new services, products and investments
- There will be opportunities to offer differentiated low-carbon products to the market
Companies that act on these longer-term opportunities will differentiate themselves from competitors, create sustainable value and secure a strategic advantage.
How we can help
We are supporting P&U clients navigate climate change and carbon regulations. Our deep knowledge of the sector and global network of professionals help utilities develop and implement their strategies to mitigate risk and make the most of the opportunities presented by a low-carbon world.
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|Read the article How do companies do business in a carbon-constrained world? – Investment decisions and bottom line|
1 Gosden, Emily,“Offshore wind farm developer DONG Energy claims it can beat government cost target,” The Telegraph, 1 March 2013.