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 / Autumn 2011 / Issue 64(originally published by Booz & Company)


Renewable Energy at a Crossroads

Similar approaches will be needed if the sector is to fully tap the potential of the residential and small commercial market. Different segments will have different wants and needs, but the most successful offerings are likely to include quick and economical installations, predictable power prices with no up-front investment, and more elegant designs. A number of companies are already engaged in sophisticated commercialization and marketing; additional business model innovation will no doubt occur as the renewables market matures.

Application Diversity

Any one of these forces would have led to some change in the industry. Together, they are pushing it past the tipping point to large-scale viability. Gone are the days when solar PV panels were considered only for small rooftop systems. Renewables technologies have broadened in scope to the point at which they can be accepted as contributors to any regional energy mix.

At the same time, renewables are finding a home at a micro scale — with some macro effect. Consumer goods, such as briefcases with solar power chargers for mobile phones, are expected to spur a compound annual growth rate of 30 percent in the $300 million market for flexible thin-film PV modules.

The military is another likely channel for future growth. The energy demands of the military are considerable: Every gallon of fuel that reaches Afghanistan from the U.S. requires six more gallons to get it there. Solar PVs have the potential to substantially alter the military’s dependence on fossil fuels. PV modules could also bring electricity to many in emerging economies, where the grid is underdeveloped and consumer electronics such as mobile phones have leapfrogged the infrastructure built for them.

Much work remains to make these markets commercially viable for PV applications, but all have the potential to drive disruptive change. One day, these new markets could dwarf the traditional rooftop solar-panel market.

A New Level of Scrutiny

Renewables have been a hotbed of activity in the past decade, and the evolving entrepreneurial environment continues to present opportunities for investment.

However, given the uncertainty and complexity in the renewables marketplace, investment decisions are now much more difficult, requiring decision-making skills and tools that were not essential before the economic downturn. Going forward, investment decisions will need to explicitly address uncertainty through effective risk management and contingency planning.

For utilities, renewables are not viable baseload technologies. Even as a complementary energy source, they carry costs that make them uncompetitive without subsidies. Power source decisions will therefore depend largely on local conditions, including the presence of renewable energy mandates, government incentives, and site availability. Here too, the array of incentives and technologies will make comprehensive business case planning and risk analysis imperative. Many utilities are more accustomed to managing older generation assets and will need to consider new operating models and program management capabilities.

Meanwhile, for large energy users, rooftop solar PV remains the only alternative to the grid. Although historically it has been the most expensive renewables option, PV costs are falling, in part because a growing number of installers are willing to take on the investment risk. In locales with sufficient tax and other incentives (for example, those offered by the California Solar Initiative), investments are NPV positive. Still, users need to be cognizant of ongoing technological, regulatory, and political risks that may shift the economics against them.

Furthermore, it will be critical for companies to develop the capabilities needed to both evaluate and add value to the assets and technologies that are likely to reenter the market in the months and years ahead. The relatively favorable investment climate of the past decade attracted a number of companies that ultimately lacked the expertise to endure and win in today’s more difficult investment environment. For example, a number of small utilities and other companies made subscale investments in renewables where they could add little value, and they may soon be forced to divest those assets. The companies that can pick up the assets and position them to create a sustained competitive advantage will be the ones that establish the right to win in this market. Clear industry leaders are already starting to emerge, but plenty of opportunity remains for those with the vision and the capabilities to power the next move forward in global energy markets.

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