The Role of the Entrepreneur in the Transition to a Renewable Energy Economy

By Ian Waight

Macquarie Graduate School of Management Greening of Business / Prof John Matthews / December 2015

Abstract

Within the context of the current industrial shift into a world powered by renewable

energy, the entrepreneurs play a vital role in the uptake and diffusion of new technology

and systems. In order to take advantage of the tremendous opportunities available, the

renewable energy entrepreneurs must have an intimate understanding of the markets, the

governmental policies, investors and business trends that have led to other renewable

energy ventures’ successes. They must also be prepared to adapt to a rapidly evolving

industry. This paper outlines a framework for the entrepreneur in relation to the general

dynamic of the transition to a green economy.

Introduction

A new industrial revolution is underway and the world is changing as the “green

economy” picks up steam and is beginning to gain a real foothold. Despite a slow start over

the last few decades, there is now some real momentum and signs that the engine of this

particular economy is finally revving up. Though not without immense challenge and

required application still to come, there are and will be tremendous opportunities for

entrepreneurs and for economic growth that is characteristic of such revolutions.

As developing countries such as India, Brazil and of course China undergo massive

growth, and the developed world continues to demand power, carbon based fossil fuels will

be replaced by renewable energy as the source that fuels our world. The global requirement

for energy cannot be met by fossil fuel sources alone, and as carbon based resources become

increasingly scarce, geopolitical resource security becomes a key driver facilitating this shift

(Mathews, 2015). Additionally, accelerating climate change concerns have created an urgent

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call for governments to actively pursue policy to reduce our dependence on fossil fuel in

favor of renewable technologies.

In classic Schumpeterian fashion, renewable technologies aim to creatively destroy the

existing fossil fuel based industry. It is through innovation and the activities of the

entrepreneurs that a “perennial gale of creative destruction will disrupt the existing

paradigm” and thus will contribute to economic growth (Kiesling, 2013). For Schumpeter,

the role of the entrepreneur is crucial in this process, and thus in this transition to a new

renewable economy the entrepreneur is highly significant. It is the entrepreneurs who

introduce new combinations to the economy in the form of new products and resource,

develop new markets and practice new organizational forms (Nguyen & Boberg, 2010). The

market disequilibria that are created by new, innovative systems deployed by the

entrepreneurs are then imitated by followers and the innovation gets diffused.

This paper will focus on the role of the entrepreneur in the transition to a renewable

energy green economy. As pivotal change agents, the entrepreneurs engage in both push

and pull type of activities as they respond to external incentives as well as implement their

own drivers for success. They must be aware of public opinion, political shifts, economic

trends and technologic advances, all of which are constantly changing and updating. As

such, they must be must remain highly attuned to all the dynamics in play along the value

chain as well as to the institutional environment in order to best exploit the opportunities

and facilitate diffusion. Understanding the nuances of all the interactions and concurrently

seeing the big picture in this complex market is crucial. This paper attempts to create a lens

with which to view that picture.

It should be noted that this discussion will focus primarily on Western Capitalistic

markets in the developed world. The research draws from data primarily from Europe, the

United States and Japan, and consequently the conclusions will be most relevant to those

particular markets. While it is recognized that China and the other developing nations

should not be disregarded in the discourse, further research would need to be conducted to

offer comparative insights and learnings.

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The Landscape

The emergence of any large scale shift in an industry is a difficult and uncertain process,

and the current transition to renewable energy is certainly no exception (Jacobsson &

Johnson, 2000). In our modern capitalist economy, the entrepreneurs’ involvement is

paramount, and arguably renewable innovation uptake and its diffusion would not occur

without the activities of the entrepreneur (Meijer, Hekkert, & Koppenjan, 2007) (Jacqmin,

2015). Therefore, in order to successfully drive this transition, governments must facilitate

the conditions in which entrepreneurs are compelled to act in their pursuit of an

opportunity. Successful policy implementation effectively splits an economy open and

creates the “economic space” for new interests to flourish which previously were dependent

on traditional energy systems (Mathews, 2015). Finding and exploiting this “space” is key

for the entrepreneurs’ business success.

In the new economy, the entrepreneurs will find themselves with a naturally competitive

advantage as the challenges of transitioning to green will become opportunities. New

sustainable businesses can benefit from better access to certain markets, differentiated

products, green revenue, better risk management, better stakeholder relations, and lower

costs of resources and energy (Ambec & Lanoie, 2008).

However, it is important to recognize the paradox of the “green prison.” While there may

be intense interest and enthusiasm for the development of such green initiatives as

renewable energy, and indeed there may exist a very real collective benefit from its

implementation, the green entrepreneurs find themselves at a distinct disadvantage when

pursuing the more costly green alternative. In order to “escape the prison,” the rules of the

game must be changed by transforming the economic incentives (Pacheco, Dean, & Payne,

2010).

The notion of the prisoner implies a level of helplessness, when in fact the entrepreneurs

may be able to create their own opportunity for escape by proactively influencing

establishment legislation and societal norms through collective action and institutional

entrepreneurial endeavors. (González-González, Zamora-Ramírez, & García-Hernández,

2015). Entrepreneurs can form industry alliances, strategic partnerships, lobby coalitions,

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advocacy groups and other pooled resource associations. To restate bluntly: the

entrepreneurs carry some responsibility to actively promote, transform and develop the

institutions that will support the incentives for renewable energy, and consequently for their

businesses.

A New Type of Entrepreneur

Motivations

This current industrial revolution and the transition to a green economy have

motivations that at its core are not fundamentally profit driven. Accordingly, there is a new

breed of entrepreneur – the sustainable entrepreneur – that is emerging in parallel to the

development of the green industry. In line with the general catalysts for the green transition,

the sustainable entrepreneurs’ motivations consist of three constituent parts:

environmental, economic and socio-political sustainability. The profit motive is still an

underlying driver for this new class of entrepreneurs, however their interests in monetary

rewards is balanced by strong motivations to solve the problems related to these

sustainability concerns – often referred to as the “triple bottom line” (Bell, Stellingwerf,

Achtenhagen, & Rendahl, 2012).

Not all so-called sustainable entrepreneurs share the same level of commitment to their

triple bottom line, and thus some maintain profit motive as their primary interest in

building their venture. However, these “opportunity driven” firms tend to be less successful

in the sustainability sector as their conventionally designed business models have a difficult

time embodying sustainability values. In contrast, “sustainability driven” ventures possess

the right set of values and motives, coupled with the focus to employ the skills to succeed,

and thus a profitable business then becomes the vehicle to achieve its goals (Parrish, 2010).

In many ways, the entrepreneurs involved with the transition to renewable energy still

follow the same principles of any entrepreneur: developing opportunity, gathering

resources, building and managing operations, all with the goal of creating value (Leach,

2015). The notion of identifying opportunities in an existing industry with the intention of

creating value in the midst of market disequilibria applies to sustainable entrepreneurs who

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target an environmental imperfection which they aim to solve. (Schaltegger & Wagner,

2011).

Thus we find the motivations of the sustainable entrepreneur to be highly complex,

being influenced by a myriad of factors beyond just the traditional monetary drivers.

Political and social institutions effect market process and influence motivations both

economic and non-economic. The formation of agencies and regulations governing

environmentally harmful activities, international treaties, as well as informal institutions

such as public attitude all factor into the design of the business (Nguyen & Boberg, 2010).

Uncertainty

New industries and the emergence of new innovation involve a certain amount of risk

and uncertainty. The robust ability to manage these risks and make decisions in the face of

uncertainty is a defining characteristic of an entrepreneur that distinguishes them from

other types of business people and laggards to an industry (Leach, 2015). Nevertheless,

entrepreneurs’ decision making process is still highly affected by perceived levels of

uncertainty, and thresholds exist that will inhibit their willingness to engage in a particular

activity (Bell et al., 2012).

The top three sources of uncertainly for renewable energy entrepreneurs are: policy,

technology, and resource uncertainty. Secondary sources of uncertainty include

competition, supplier and consumer variables (Meijer et al., 2007). The entrepreneur must

examine these factors carefully for full understanding of expected risks.

The relationship between perceived uncertainty and the decision to take action in

renewable energy ventures has many facets and is balanced by the individual motivations of

the entrepreneur as they consider each component of their triple bottom line aspirations.

(Meijer et al., 2007).

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Governments

Social Capitalism

With respect to the renewable transition, it is interesting that in recent times as China

moves away from a strict communist nation to adopt some of the principles of Western

Capitalism, the governments of the Western world have taken a more active hands-on role

in the drive to build the industry. The concept of “social capitalism” argues that for certain

industries and sectors, governments cannot be invisible and rely solely on market forces to

achieve desired outcomes (Clark Ii & Li, 2010). Such is the case with energy: governments

must ensure a fair distribution of power to its citizens and not allow access to energy based

exclusively on economics.

Therefore, even in highly capitalistic economies like the United States, strong

governmental influence is required to drive renewable energy uptake. This is precisely what

has occurred in California, and as a result the State has a booming renewable energy sector

(Del Chiaro, 2006). In other flourishing renewable markets, such as Japan and the

European countries, social capitalism is the norm and government is merely considered to

be a market force in its own right, that injects its influence into the overall economic

dynamic (Clark Ii & Li, 2010). Thus, in contrast to other industries and markets, the

renewable energy entrepreneur must be intricately attuned to the activities of the specific

governmental jurisdiction he wishes to operate under. This is perhaps the most important

element for the renewable entrepreneur to comprehend.

There have been several strategies employed by governments in different countries

around the world to influence the development of renewable energy, each with differing

degrees of success. In some cases complete market restructuring has taken place to

introduce wholesale market competition. However, examples of this strategy in the UK,

California and Canada have shown this to be a risky approach with potential for disastrous

outcomes (Woo, Lloyd, & Tishler, 2003). While it may seem appealing for the entrepreneur

to quickly enter a market that is undergoing reform – such as deregulation or transitioning

from a state owned to a privately owned enterprise – research has shown that market

reform tends to not be a reliable driver for a thriving renewable energy sector (Alagappan,

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Orans, & Woo, 2011). Historically, these markets are poorly designed and suffer from power

abuses of large players. Consequently, the entrepreneur should avoid such conditions in

favor of alternate policy schemes.

Feed in Tariffs

In general, the literature seems to indicate that the most successful tool governments

can employ to drive the uptake of renewables is the feed-in-tariff (FIT). The central

principle of a FIT is to guarantee the price of electricity generated by renewable means for a

fixed period of time. The price structure of a FIT is based on the level of cost associated with

the development of the renewable energy source such that the developer gets a “guarantee”

for payment for the project. This has the effect of significantly reducing the risk to the

entrepreneur and thus lowering the perceived levels of uncertainty (Lipp, 2007).

There are many examples for structuring FIT policies that have been enacted in various

countries with different subtleties; however there are two basic types of FIT policy: market

dependent and market independent.

Where the remunerations are a fixed price and do not change with market price of

energy, the FITs are “market independent.” This type of FIT offers a guaranteed minimum

payment usually based on the development cost of the technology. This policy offers the

greatest level of security to the developer as it allows for the most predictable revenue

streams. Consequently, this has been one of the more successful FIT policies for fostering

market growth (Couture & Gagnon, 2010). This has been the main strategy employed in

Germany. The disadvantage of fixed price FITs is that they can create economic distortions

over time as their price remains stable regardless of whether the market price trends

downward. Nor do their prices adjust with prevailing demand over the course the daily

cycles. (Lesser & Su, 2008) While this may be good for the entrepreneur, it may be less

desirable for the general consumer.

“Market dependent” FITs are correlated with the market price of energy but place a

premium above the spot price as demand dictates to the market. While obviously this is not

as secure for the entrepreneur and investors, market dependent policies may be more

beneficial to end consumers as they may allow for a more economically efficient energy

market (Couture & Gagnon, 2010).

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Within each of these two variations of FIT policy, there are examples of additional

subtleties that can be found in different markets; however the details are beyond the scope

of this paper. Each variation has its advantages and disadvantages, and the entrepreneur

should be aware of how the particular policy aligns with their own motivations and business

models. Additionally, entrepreneurs should be acutely aware of any phase out or down

ratchet stipulation to the policy that would, over time, remove the security of the FIT. The

venture’s business model should be structured to account for this eventuality.

Investors

Similar to generic entrepreneurial endeavors, the role and the relationship between the

renewable entrepreneur and the investor is intricately linked must be considered. Due to the

often large volume of funding required and the long payback periods, there are some special

characteristics unique to renewable energy investment. Moreover, the industry contains a

significant amount of uncertainty and is considered high risk, and thus for the entrepreneur,

raising capital can be very difficult (Cárdenas Rodríguez, Haščič, Johnstone, Silva, & Ferey,

2015).

Therefore, entrepreneurs should understand investor motivations and recognize the

variables that influence successful capital investment in renewables. While many of the

same conditions described in the previous section will also apply to the motivations of the

investor, there are some additional nuances that will also influence investment.

Research finds strong correlation with policy measures (e.g. feed-in-tariffs, tradable

renewable certificates, sales tax or VAT reduction, and direct capital investment support

through subsidies, grants, rebates, and tax incentives) in inducing early-stage financing

(Criscuolo & Menon, 2015). However, there is evidence to indicate that overly generous FIT

and other policies will actually discourage investment as they can be seen to be potentially

unsustainable (Cárdenas Rodríguez et al., 2015).

While strong governmental involvement in the form of policy is desired by investors,

markets that are heavily supported by public investments tend to deter private investor

involvement, as private investors may perceive a “crowding out effect” (Rodríguez, Hascic,

Johnstone, Silva, & Ferey, 2014).

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Other factors that influence investor uncertainly include strength of political support

and policy risk over time. The unique and ambitious combinations of various policy

instruments has also been found to positively correlate with investment amounts, however

isolating the specific effects is complicated and varies with particular types of renewable

technologies (Cárdenas Rodríguez et al., 2015).

The topics of eco-finance and the growing movement of private investment in green

technologies are expansive and detailed. Investors are rapidly divesting from fossil fuel and

interest in eco-finance is increasing (Nussbaum, 2015). In depth exploration of this topic

will be left for another paper, but needless to say the savvy entrepreneur will stay current

with the trends to best take advantage of available instruments and funding.

Business Models

Investment managers utilize business models as indicators of inherent value of a venture

and the measure of the firm’s potential to generate returns. As an entrepreneur seeking

capital from investors it is crucial to understand the preferences of the investor and what

kind of qualities they are seeking in the business model. (Leach, 2015). Not surprisingly,

renewable energy business models with a strong focus on technology development and

production are preferred by investors, but interestingly “customer intimacy” is one of the

most preferred characteristics (Loock, 2012).

Indeed, business models that emphasize best services and customer support are favored

over simply offering lowest cost or best technology. The implications of these findings

support the importance of the value proposition to the end customer. Moreover, business

models that focus on innovation should aim for leading the industry in capability. If the

entrepreneur’s innovation is only industry average, they are better to focus on marketing

and sales (Loock, 2012). Patenting in renewable energy technology remains highly

concentrated in larger, incumbent firms that typically focus on incremental technology

developments, whereas newer startup firms are more likely to utilize highly innovative

technology and establish themselves as industry leaders. (Nanda, Younge, & Fleming, 2013).

Regardless of the strategy – industry leader or fast follower – technology is still at the

core of the business and as such is significant influence on the entrepreneur. Expenditure on

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research and development to progress innovation is a key driver in the market. Public

expenditures in R&D have had significant impact in Europe and the U.S., facilitating

market growth as innovation in green technology lowers costs and enables market

competition with fossil fuel energy (Wangler, 2013) (Horner, Azevedo, & Hounshell, 2013).

This has also been a central pillar of the overall strategy in China that has enabled the

incredible rate of uptake of renewables in recent years (Mathews, 2015). Furthermore,

private investment in innovation is increasing as venture capital funding has been on the

rise since the early 2000’s (Nanda et al., 2013), and recently there have been high profile

pledges from companies like Google and Apple to invest in renewable R&D. Regardless of

the source of the innovation funding, entrepreneurs need to be aware of the “demand- pull”

or “technology-push” dynamics that shape market forces and tailor their business models to

suit (Aslani & Mohaghar, 2013).

Business Model case studies

The entrepreneur must consider the optimal business model to exploit the particular

“economic space” that is created. To illustrate how different conditions present different

opportunities, presented here are three mini case studies from California, Japan and

Germany outlining the business models that have resulted in growing markets.

In the United States, the Third Party Ownership business model has emerged to become

one of the primary methods of deploying photo voltaic systems to the residential sector,

accounting for 70-90% of all new installations in California, Arizona and Colorado (GTM,

2013). The idea behind this model is that the TPO firm is a full service company who

actually owns and maintains the PV system, but coordinates with their customer to install

the system on the roof of their home. Under a power purchase agreement, the TPO then

sells electricity directly to the customer at predictable prices for the life of the contract

(Coughlin & Cory, 2009).

In Japan, substantial governmental subsidies for residential PV allowed the growth of

the industry, backed by strong assurances from the government for the continuation of the

subsidies. Entrepreneurs developed business models that involved “cross selling” the PV

systems as part of larger whole house package. Since the expense of the PV system is

integrated in the home mortgage, the cost becomes absorbed into the larger purchase of the

house. Through marketing and collaboration with the prefabricated home sector, the PV

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industry played an active role in the growth and success of this model (Strupeit & Palm,

2015). This is an excellent example of escaping the green prison.

The value proposition of the majority of German PV firms is for increased self-

sufficiency and protections against future energy price rises (Graebig, Erdmann, & Röder,

2014). The “host-owned feed in model” relies on the economic viability of the system as a

main selling point to the consumers. This is guaranteed by a feed in tariff rate that ensures a

competitive return on investment as compared to other investment 0pportunities (Sühlsen

& Hisschemöller, 2014). Within the context of the European Renewable Energy Act, the

German government, consumers and entrepreneurs have collectively been developing their

PV industry since the 1990’s (Strupeit & Palm, 2015).

A common theme in each of these examples is the presence of a strong value proposition

that is focused on the customer at its core and offers solutions to lowing complexity and

transaction costs. This reiterates the requirement for the entrepreneur to establish not only

a powerful value proposition but one that creates and captures value for the customer

(Osterwalder & Pigneur, 2010).

Parity

As technologies improve and costs come down, the point at which renewable energy

production becomes cost competitive is rapidly approaching “grid parity.” In some markets,

renewable development may already be able to compete with conventional fossil fuel

sources (Breyer & Gerlach, 2013), and the entrepreneur must be able to frame the business

such that it is not reliant on policy support from government, but is an equal player in the

market. What then are the key drivers when the renewable markets become mature and

policy support gets scaled down?

As this is only a recently emerging trend, the research is still currently developing.

Focusing on Germany, Karakaya et. al., highlight some interesting findings. There is a

strong positive influence of social pressure among peers to adopt PV technologies as social

norms drive consumers to contribute climate solutions. Positive imagery of renewables in

the mass media and increased focus in schools has led to high acceptance among younger

generations (Jager, 2006). Additionally, the public’s recognition of the price uncertainty of

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fossil fuel based energy is noted as being a key driver for PV uptake. Of particular interest to

the entrepreneur is the effect the local company can have on adoption rates as they can be

perceived as positive change agents who reduce the overall complexity of renewable systems

implementation (Karakaya, Hidalgo, & Nuur, 2015).

To be sure, entrepreneurs must remain accustomed to challenges of a changing market.

Once the industry becomes mature and the external support structures diminish, businesses

must continue to be innovative and adapt to the changing environment. Again, using the

German example, firms are already experiencing loss of revenue as the feed in-tariffs are

reduced and the business models are not modified accordingly. (Karakaya, Hidalgo, & Nuur,

2016) 2015). Business models must be updated and not remained bound to policy once it is

removed. In the spirit of entrepreneurship, continuous innovation is required for ongoing

business success in a dynamic environment.

Conclusion

The aim of this discussion has been to use broad strokes in framing the role of the

entrepreneur in the context of the renewable energy industry. This wide and deep topic has

significant potential for further research in each of the areas covered here. The main drivers

for the development of the industry are governmental policies designed to incentivize

market growth. As a result, investment is strong and continues to grow as different business

models demonstrate viability and the industry as a whole moves towards becoming market

competitive with traditional energy business. Amidst all this, the entrepreneur has immense

opportunity to build and operate their venture as a means to contributing to the overall

disruption inherent with the transition.

The transition to renewable energy is really about a transition to a new economy – the

green economy. The key players in the economy are the green capitalist entrepreneurs

whose business models must respond to current regulations to maintain the sustainability

of the economy. These restrictions are not seen as obstacles for the green capitalist, but

through innovation they become opportunities, from which they can profit by their ability to

benefit from eco finance, participate in circular economic flows and reduce carbon

dependence (Mathews, 2015).

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