Examining energy expectations

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The energy landscape ahead is very complex [and] complexity can breed uncertainty, making it difficult for companies and society to identify how best to respond. We can be certain of one thing: there is no ‘silver bullet.’ And solving the challenge will require action by all the players: government, energy providers, industry, and individuals in society at large.” –Gerald Schotman, chief technology officer and executive vice president-innovation, research & development, Royal Dutch Shell

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There’s this excellent little vignette at the end of a recent study produced by the Harvard Business Review Analytic Services in association with Royal Dutch Shell that really sums up the unspoken but widely held view (in my opinion) concerning global energy needs in the coming years.

The study – entitled Global Business and the Dawn of a New Energy Reality – polled 1,748 executives across the business world to dissect their views on energy consumption, conservation efforts, and whether they’d actively pursue the use of alternative energy sources such as solar, wind, etc.

What got my attention the most, though came at the very end of the study where an executive at a billion-dollar entertainment corporation, operating from multiple sites, detailed the firm’s “business energy mindset” if you will.

The company started in ways that seem small but paid off big, like turning out the lights. For example, when its outdoor facilities close at the end of the day, the company now forgoes the all-night illumination that it once considered a promotional cost, a sort of "nighttime advertisement," Harvard’s researchers reported.

The firm also now contracts with a third party to source its electricity at a better price, and it is launching a solar partnership. In addition, it sells its drums of used cooking oil for conversion into biodiesel fuel – even investing $60,000 in equipment that purifies the oil, thus allowing the company to command a higher price for it.

Sounds like this company espouses a “green” philosophy, which many would assume probably includes a lot of tree hugging and other “earth friendly” activities. Not even close, the executive told Harvard’s team: “We’re purely about price. Whatever is the cheaper energy source is the one we go after.”

Thus Harvard’s researchers reached this conclusion: Even for energy, the future — as global and undecided as it is — focuses on the bottom line.

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That shouldn’t come as a surprise to anyone, of course, but then again it’s good to get this plain fact out in the open. Indeed, the majority of the executives polled in Harvard’s energy study freely admitted that the “sprawling global economy’s energy needs” and the resulting demand for innovative energy solutions and infrastructure stretches far beyond their control.

As a result, they look to government for leadership to support broad-scale alternative energy development and conservation – favoring government incentives and funding to foster sustainable energy development. [Wow! Guess business likes government involvement in the energy market after all, eh?]

Here are some other interesting tidbits Harvard’s research uncovered:

• The gap between energy demand and supply concerns three-quarters of organizations. The security of national energy supplies is of major importance, with over half (54%) strongly agreeing it is an issue of global importance.

• Almost three-quarters say energy costs have become a greater concern in their personal lives, but only half say their companies consider the rising costs of energy as important.

• Energy issues drive innovation in a new range of products and services to meet the demands of energy-conscious consumers and companies. A third of organizations have remade products to be more energy efficient and plan to introduce new ones based on their energy-saving potential.

• More than one-third of organizations identify their corporate culture’s resistance to fresh ideas as having been a barrier three years ago, but only 22% point to it as one over the next three years.

• Greater collaboration and open innovation are seen as valuable catalysts for progress, yet six out of ten organizations still identify competitive conflict as a hurdle.

• The majority expects government support and leadership in the drive for a more sustainable global energy resource base.

• More than half of the business leaders polled advocate that government and industry develop new infrastructures to support alternative energy sources as relatively few expect the existing infrastructure to support solar, wind, tidal power, and other favored alternative energy sources.

• Seven out of ten are not only concerned about home energy costs but also have made major changes in their homes and lifestyle in response.

All of this comes at a time when global energy demand is expected double by 2050, which is why executives in Harvard’s survey stressed that groundbreaking approaches are urgently required.

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Based on experience with solar and wind energy, the development and commercialization of new energy sources will take decades, so action is needed now. But the survey found no major consensus among the executives around which solutions are best, how they should be delivered, or the role of business in making this happen.

Instead, the leaders in the survey made clear that the government must lead in putting new policies, incentives, and infrastructure in place before real changes in energy will occur.

Harvard’s team referenced two key points made in recent report by the American Energy Innovation Council to illustrate this point:

• First, innovations in energy technology can generate significant, quantifiable public benefits that are not reflected in the market price of energy. These benefits include cleaner air and improved public health, enhanced national security and international diplomacy, reduced risk of dangerous climate change, and protection from energy price shocks and related economic disruptions.

• Second, the energy business requires investments of capital at a scale that is beyond the risk threshold of most private-sector investors. This high level of risk, when combined with existing market structures, limits the rate of energy equipment turnover. A slow turnover rate exacerbates the historic dearth of investments in new ideas, creating a vicious cycle of "status quo" behavior. Government must therefore act to spur investments in energy innovation and mitigate risk for large-scale energy projects.

Yet the executives polled in Harvard’s study are pretty brutal in their take on energy policy efforts to date, giving what the research team described as “mediocre marks” to energy companies, trade associations, and other entities for alternative energy development, reserving their loudest complaints for national governments – with almost six out of ten expressing low satisfaction with governmental efforts.

If anything, Harvard’s study illuminates just how complicated it’s going to be to develop a coherent energy policy in the U.S., as even business leaders seem to be conflicted on how to deal with global energy needs now and in the future.

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