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World Energy Congress Paper Framework

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World Energy Congress Paper Framework

    Going Green: The Business Case for Greening your Energy Company

    Devenir Vert : le cas commercial pour l’incorporation des valeurs vertes dans votre société énergétique

Author: Dr Greg Lavery

    Abstract

    We are all familiar with the challenges facing the energy industry: supply security, climate change, emerging cleaner technologies, retail competition, staffing, and the quest for growth. This paper demonstrates how a proactive environmentally considered (“green”) corporate

    approach addresses these issues and unlocks four tangible areas of value addition for energy companies. Based on over a decade of experience by the author in this emerging field, this paper provides some golden rules for companies considering the green approach and showcases an Australian market leading energy company who is unlocking green value.

    Nous connaissons bien les problèmes qui s’opposent à l’industrie énergétique : la sécurité de la provision, le changement du climat, l’apparition des technologies plus propres, la concurrence du détail, l’embauche, et la poursuite de la croissance. Cet exposé montrera qu’une approche corporative `verte’, basée dans une considération proactive de l’environnement, abordera les problèmes ci-dessus et donnera accès à quatre secteurs

    sensibles de valeur supplémentaire pour les sociétés d’énergie. Fondé sur une décennie d’expérience acquise dans ce domaine croissant, cet exposé fournira des règles d’or pour les sociétés qui veulent adopter une démarche `verte’. Il examinera une société énergétique qui domine le marché australien tout en donnant la clé de la valeur verte.

    Introduction

    The energy industry is facing an array of challenges. Security of supply is now a key issue forcing us to think harder about how we source and move energy. Concern about climate change is leading to a reprioritization of alternatives thanks to the pricing of carbon. New cleaner technologies are rushing down the experience curve and are close to being cost-competitive with traditional sources. Retail contestability is creating unprecedented competition in electricity and gas markets. And the industry is finding it difficult to attract and retain staff.

    All of these issues present both risks and opportunities for the industry and participants have chosen a variety of responses with varied success.

    A model of response which is proving successful and being adopted across a range of industries involves a proactive approach to environmental issues which is referred to in this

    paper as “green” corporate leadership. This green leadership is not about compliance, instead it is about organizations acknowledging environmental issues and their role in causing them and acting to fully understand and be part of the solution.

    To date, thinking around green leadership has been ad hoc. This paper articulates the value of such an approach and identifies a number of rules for success.

    Methodology

The author has studied green leadership for over a decade in several industries. This began 1with the construction industry at doctoral level and for the last 5 years has examined the

    energy industry.

As the subject is an emerging one, the author adopted a hands-on approach to green 2business and managed a portfolio of clean energy businesses within a large vertically

    integrated energy provider from 2001 to 2006.

    This paper therefore draws from practical business experience in the energy industry as well as other industries.

    The value created through green leadership

    Unlike a many industries, the energy industry has a tangible link to the environment through both its emissions (most especially of carbon dioxide in a world increasingly concerned about climate change) and use of water.

    Given this tangible causative link, participants in the energy industry (or any other industry with a similar link) who choose to take a proactive green leadership position are able to unlock value in four ways:

    1. Creating growth opportunities

    Supply security, climate change, and emerging new technologies can all be viewed from an environmentally considered perspective:

    ; Supply security is about how energy is sourced and transmitted. Tapping into low

    emission, locally available energy sources close to where they are needed reduces

    environmental impact as well as the need for energy imports, transportation, losses, and

    the need for a distribution network and thereby the risk of power outages if the grid is

    damaged.

    ; Climate change by its nature is linked to the environment.

    ; Emerging new technologies are becoming more efficient at harnessing the energies of

    nature without the environmental impacts of fossil fuels.

    Therefore those who are at the forefront of alternative energy solutions will be best placed to identify, understand the risks involved with, and invest in solutions to these issues ahead of the rest of the market thereby creating value.

    Put another way, green leadership positions a company to benefit from the structural changes in the energy industry which are emerging as a result of supply security, climate change and competitive new technologies.

    An example of a technology which has emerged from such structural changes is solar photovoltaic power which has grown at over 30% per annum for over a decade. This technology is racing down a steep experience curve, supported by governments in most developed nations because it addresses the issues of supply security and carbon emissions. The last few years has seen multi-billion dollar floats of Sunpower, REC, and Suntech which

    created a personal fortune of over US$3 billion for Dr Zenrong Shi who founded the company just three and a half years earlier.

     1 Lavery, G.J. Towards an Environmentally Considered Building Design Approach for Architects and Engineers,

    Doctoral thesis, University of Queensland, 1998.

    2 This portfolio of clean energy businesses included: energy efficiency consulting, photovoltaic system retailing,

    cogeneration project development, compressed natural gas vehicle conversion and infrastructure, ground

    linked heat pump retailing, developing agricultural applications for LPG, and wholesaling of cleaner

    refrigerant gases

    Further growth in photovoltaics is expected to occur with an explosion of demand expected when the technology becomes cost competitive with grid power.

    The photovoltaic sector is just one example. Consider also the wind sector, biofuels and carbon trading. It is expected that the growth in these industries will accelerate further in coming years and new growth areas will emerge to join them, such as geosequestration, solar thermal electricity generation, solar hot water, and energy efficiency.

    2. Reducing risk

    Supply security, climate change, and emerging new technologies represent some of the most significant risks for energy companies. For example, a US$20/tonne carbon dioxide value which could be introduced in the next 5 years impacts heavily on the investment decision for a US$1 billion coal fired power station that will last for 50 years.

    Adopting a proactive green approach requires that a company fully understand both its environmental risk exposure and alternative technologies (many of which inherently are more secure), thereby enabling a company to better reduce its exposure to supply, carbon and technology risk.

    Clearly this is not just being green this is good business practice which is made easier by an approach which seeks to fully understand and quantify risks.

    3. Extending your product range

    Energy companies are discovering that consumers will pay more for a greener product. Not all customers but certainly a growing percentage of them. All they demand of the seller is that they not be ripped off. This then provides an opportunity for a proactive company to leverage its existing customer relationships to offer greener products at a percentage margin equal to or slightly greater than their non-green products.

A larger and greener product range has a number of advantages even if initially only a few

    customers buy the greener products:

    ; Additional revenue and “share of wallet” from customers who buy the new products 3; More points of contact through multiple products and thereby deeper customer

    relationships leading to greater loyalty

    ; Reinforcement of the company’s brand and strong corporate values – capturing the

    attention and support of customers even if they choose the non-green alternative 4. Differentiation

    Green leadership allows a company to differentiate itself (highly desirable in a competitive retail situation) in two ways.

    Firstly, green leadership can transform the energy purchasing experience. Energy is essentially a grudge purchase - no consumer likes to pay their electricity bill or hand over cash at a filling station. However, there is an emerging green consumer segment who prefer (and sometimes even get a kick out of) the satisfaction of buying a product that is not harming the environment and that is setting an example for other consumers. This is transforming a grudge purchase into an emotional one.

Consider, for example, the Toyota Prius. Owners report: “I feel fantastic when I drive around 4town in my Prius knowing that I am living a low emission lifestyle”

     3 Referred to by marketers by the somewhat sinister name of “customer entanglement” – a term not used in this

    discussion because of inappropriate negative connotations. 4 Personal communication with D. Almagor, Prius owner in Melbourne, Australia, 2006.

    Secondly, a company can differentiate its identity from its competitors. This is especially useful in electricity and natural gas retailing, where electrons and gas molecules flow into a home at the flick of a switch completely undifferentiated. How then can an electricity or

    natural gas retailer differentiate itself? One way is through being green. Another way is to spend a lot of money on brand building which marketing research has demonstrated has a

    limited impact. However, green customers (estimated at 10% of all consumers) who are 5passionate about the environment retain a brand that shares their passion for longer.

    Intangible value addition

    There are a number of other benefits of the green approach whose value add is less tangible. These include:

; Improving staff recruitment and retention through the realignment of the company’s

    practices and objectives around shared and virtuous values

    ; Improving a company’s licence to operate through operating beyond compliance. This

    can bring benefits such as more trusting relationships with approval authorities ; Raising the bar for competitors

    The cost of green leadership

    While the value addition of a green approach has been discussed, it is fair to consider the cost of this approach.

While some companies have spent many millions advertising their green leadership (eg GE 6whose advertising campaign for Ecomagination cost an estimated US$90M), others have

    discovered that green consumers are wary of such overt marketing, preferring instead to see 7the advertising money spent on improving products for the benefit of the community. This

    can be done by developing green products and selling them as hero products within the same advertising spend. This differentiates the brand, sells green products, and transforms the energy purchase experience from grudge to emotional.

To be proactive requires a more holistic approach to business looking further into the future

    and at a broader range of alternatives. For some energy companies this will come from unlocking skills and enthusiasm within existing staff and other companies will need to recruit to fill these gaps.

    Also in terms of costs it is noted that green leadership must be whole-hearted and consistent across a company’s operations and over time. This can reduce a company’s options for the future (such as ruling out building a coal fired power station) and this should be weighed as

    a cost of adopting a green approach.

    Case Study: Origin Energy

    Origin Energy is one of Australia’s top 50 listed companies with a market capitalization over US$4 billion. It is a vertically integrated energy company, with oil and gas exploration and production, trading, electricity generation, distribution asset maintenance, and electricity, natural gas and LPG retailing to over 3 million customers in contestable retail markets.

    Since 2000, Origin Energy has taken a position of green leadership which has allowed it to achieve the following outcomes each of which has strong benefits for the company.

     5 Ray, P. & Anderson, S.R., The Cultural Creatives: How 50 Million People are Changing the World, 370p, Three

    Rivers Press, New York, 2000. 6 Source Adweek, USA 7 Ray, P. & Anderson, S.R., The Cultural Creatives: How 50 Million People are Changing the World, 370p, Three

    Rivers Press, New York, 2000.

1. Growth opportunities

    Origin Energy is already profitably trading carbon in a country where no formal carbon market exists. While this is generating additional profits, it is also providing a forward carbon view which informs the company’s energy trading strategy and investment decisions. It also provides Origin Energy with valuable experience in carbon trading and generating carbon credits in preparation for a carbon constrained economy.

    Origin has invested in the revolutionary new low-cost SLIVER photovoltaic technology. This provides the company with an international growth opportunity in a rapidly growing industry. It will also provide a sustainable competitive advantage for Origin Energy when PV becomes grid-competitive and new electricity retailing models emerge.

Through its investment in Geodynamics the leading developer of Hot Rock electricity

    generation Origin Energy has a foundation stake in this promising low emission base load generation technology.

    2. Reducing risk

    Origin Energy has a detailed quantitative understanding of the greenhouse gas liabilities of both the company and its customers, which it has used to create its energy trading strategy and uses to inform its asset investment decisions. This information is also used in the preparation of the company’s annual Sustainability Report

    Through its credibility and forward thinking about green opportunities, Origin Energy has managed to secure substantial government funding for lower emission initiatives which has

    significantly reduced the investment risk of several projects.

    With a respected and credible opinion in government policy debates, Origin Energy has been invited to discuss the implications of policies and offer its own alternatives which benefit the environment. This has both reduced regulatory risk for the company and created new business opportunities.

    3. Extended product range

    Origin Energy is the largest retailer of solar photovoltaic systems in the country, generating profits from this add-on business and providing a product not offered by competitors

    therefore enabling the company to use PV as a hero product in marketing.

     8Origin Energy is selling carbon offsets to customers, enabling them to generate profits form

    this new product and also invest in (and build expertise in) emission reduction projects ahead of a formal carbon trading scheme.

     9With a market leading position in Green Power, Origin Energy is finding customers are more

    loyal and therefore more valuable to the company because the product is an emotional sale rather than a grudge purchase. Internally, Origin Energy are also seeing an impact on some call centre staff who are happy to be helping the environment by selling Green Power.

Other products offered by Origin Energy include energy efficiency consulting services, cleaner 10refrigerant gases, compressed natural gas refueling, solar hot water, and Green Gas - all of

    which provide additional revenue, create a deeper customer relationship, and reinforce the company’s green leadership.

     8 This is done automatically through an on-line emissions calculator with carbon offset purchase attached

    minimizing costs to serve. 9 Green Power is electricity whose emissions have been offset against Renewable Energy Certificates in an

    independently managed and audited program. 10 Natural gas whose emissions have been offset.

4. Differentiation

    Through its green leadership, Origin Energy enjoys strong brand awareness amongst customers and its products are chosen by consumers ahead of competitors’, in some 11instances at higher prices.

    Other

    Origin Energy’s staff-led Green Office Program is saving thousands of dollars annually in copying paper , has reduced waste and increased recycling, and created greater staff satisfaction by giving staff greater control over their workplace.

    Thanks to Origin Energy’s annual Sustainability Report, the company also enjoys awards from and collaborative product marketing product endorsement with green not-for-profit groups, as well as investment by Socially Responsible funds.

    Note that in taking a green leadership position, Origin Energy has not increased its marketing spend above its competitors. Nor would this be beneficial as green consumers are suspicious of those companies who aggressively push their environmental credentials. It is clear that green credentials need to be earned and cannot be bought or imposed with a slick marketing 12campaign.

    Rules for going green

    There are several simple rules which have proven successful when adopting a green leadership approach:

; Full commitment is required. Green leadership is not marketing it is about core values

    and long term credibility. Conditionality or breaches of compliance destroy credibility

    quickly. Therefore before adopting green leadership a thorough examination of the pros

    and cons specific to your company is required.

    ; Calculate your contribution to climate change and other environmental issues.

    Understanding the extent of the problem is the first step towards creating solutions. ; Admit your role in climate change and the role of your customers. At the end of the day,

    customers make the purchasing decision so change needs to come from a combination of

    your company offering lower emission products at pass-through pricing (plus reasonable

    margin) and your customers adopting these.

    ; Get your own house in order. To be a leader you need to be setting an example for your

    customers and other companies.

    ; Involve staff. As with all changes, the best intentions of a CEO is not enough. Involving

    staff unlocks their passions and creativity to generate new ideas, products and

    businesses that enable the company to succeed. And you will also be able to retain these

    staff for longer and attract new ones. Let your staff be your greatest advocates. ; The more green things you do, the stronger your credibility and ability to unlock green

    value. Ongoing green innovation is vital to maintain your position and offer new and better

    value solutions to customers.

     11 Based on sales from the solar photovoltaic retailing business. 12 Ray, P. & Anderson, S.R., The Cultural Creatives: How 50 Million People are Changing the World, 370p, Three Rivers Press, New York, 2000.

It’s not too late to go green

    The field of green corporate leadership is currently immature. Catching up to those at the forefront is not difficult and there remains a vast array of activities as yet unexplored by green corporate leaders. There is also a range of alternative energy technologies that are approaching cost competitiveness that will provide opportunities for participants.

    Each company operates in geographical regions, legislative environments and has core skills which provide it with its own unique set of opportunities for green leadership which are waiting to be unlocked.

    Conclusion

    The challenges faced by the energy industry create an exciting future for those who decide on a path of green leadership a chance to add value while creating a better future. Rarely in

    history has this sort of alignment occurred, so it is up to us to make the most of it as leaders ourselves.

    Acknowledgement

Origin Energy is thanked for its support in the preparation of this paper.

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