Placing businesses at the heart of energy saving

The dramatic shouting by Barack Obama’s supporters in the presidential election of “Yes, we can!” was a vivid manifestation of the confidence that many tend to have in politicians and governments. Since governments cannot be everything to their people, many have indeed since come to understand that even Obama cannot perform miracles.

It is evident, however, that renewable energy and environmental activists continue to place grand expectations on their governments when it comes to making green investments to fuel the transition towards a sustainable energy future. While much of this expectation has to do with a widespread belief that going green is the duty of governments, time has come to consider the often overlooked piece of the green economy puzzle — the business community.

Consider this — the International Energy Agency (IEA) estimates that the world needs to make an annual green energy investment of $2 trillion (Dh7.4 trillion) up to 2020 if we are to avoid an increase in global temperatures of two degrees celsius or more. Keeping global temperature increases within ‘safe limits’ is not trivial because excessive warming would not just hamper economic growth but could also bring unprecedented heat-waves, severe hurricanes and life-threatening rises in sea levels.

Because governments do not have infinite capacity, a sizeable chunk of the required green investment is slated to come from the private sector.

It is true that government spending might be capable of stimulating interest in clean energy, but the experience of many countries tells us that government backing cannot be sustained to fully support the growth of this industry. Empirical evidence from the US clearly shows that clean energy production has been pegged to government subsidy programmes.

Green subsidies

Growth rates of the clean energy markets has been fluctuating every time green subsidies come and go. Governmental support to incentivise the private sector to invest in large infrastructural projects is not limited to the offer of investment subsidies, but setting supportive regulations is also equally important.

Just a couple of years ago, the US failed to pass legalisation that would put a price on carbon. This failure was a significant disappointment to major investors such as Deutsche Bank who eventually decided to focus their $7 billion green investment fund in China and Western Europe.

There is no doubt that policy and regulatory frameworks play a key role in influencing the attractiveness of a place in which to invest in clean energy. However, regulations and policy instruments are unlikely to work without the active engagement of the private sector which can only be achieved through the development and adoption of successful business models.

There is a growing understanding, at least in the West, that proactive private investors should not wait for a perfect policy and regulatory regime that will remove all possible risks. The extent to which companies change their business models due to their view of sustainability as both a necessity and a profit-making opportunity has been the focus of an annual survey published by the MIT Sloan Management Review.

The 2013 survey, to which over 2,600 executives and managers responded, has shown that nearly 50 per cent of companies have substantially changed their business models to make a profit out of sustainability opportunities.

Innovative business models

Given the high upfront investment costs usually associated with green energy technologies and solutions, a wide range of innovative business models have recently emerged to develop new financing solutions that could open up a potentially lucrative, yet untapped, green market. One of these successful models, called ‘Energy Performance Contracting’, involves projects that can be financed through the savings they generate over a predetermined period of time.

Other models have emerged based on the idea that the customer does not really need to pay for buying a physical product but rather only for using it. For example, companies have recently been formed in Europe and the US to arrange for the sharing of environmentally-friendly cars.

One immensely successful company is Zipcar which has lately stirred the appetite of Avis Budget Group who acquired it. In essence, such business models provide the customer with an opportunity to either use the green product or benefit from its service without having to take on the risk and liabilities related with owning that product.

Furthermore, not only have new public-private-partnership models emerged to arrange for the development of large-scale infrastructural projects, but concurrently the world is witnessing another innovative business model known as ‘crowd funding’. Through online platforms such as those used earlier in the music and computer software industries, companies (such as the American firm Mosaic and the British business Abundance Generation) are now connecting investors to renewable energy projects in need of financing.

The idea is very simple; investors can invest or lend small amounts of money and then get paid back with interest when the renewable energy project makes revenue from its selling power.

Challenge

The challenge remains for the business community to come up with innovative business models that will work for places where sustainable energy technologies and solutions are severely disadvantaged due to resilient policy regime conditions that favour the incumbent energy system. This super-important challenge should not mask the need for policymakers to give, at the very least, due consideration to the phasing-out of hydrocarbon subsidies and — perhaps at a later stage — to setting a price for carbon to reflect the external costs to the environment and ultimately remove imperfections in their energy markets.

After all, as has been portrayed in the seminal work of Arthur Pigou ‘The Economics of Welfare’, governments are usually perceived as both the natural provider of public goods and a corrector of externalities.

— The writer is Senior Research Fellow, INSEAD Innovation and Policy Initiative, Abu Dhabi.