Not only are energy companies in general slowly coming to the realisation that “times are a-changing”; electricity companies in particular are realising that they are facing the twin assaults of heading into a carbon constrained world and also massive disruption through technological and commercial innovation.
Let’s just look at some of the issues a Gentailer faces, and let’s look at it through the lenses of market share and growth as characterised by Bruce Henderson of the Boston Consulting Group back in the 1970s – the original Boston Square!
Henderson’s Boston Square of course has the four quadrants that I will describe by paraphrasing one of his papers.
The Star
The high share, high growth product is the ‘star.’ It nearly always shows reported profits, but it may or may not generate all of its own cash. If it stays a leader, however, it will become a large cash generator when growth slows and its reinvestment requirements diminish. The star eventually becomes the cash cow, providing high volume, high margin, high stability, security, and cash throwoff for reinvestment elsewhere.
Cash Cows
Products with high market share and slow growth are “cash cows.” Characteristically, they generate large amounts of cash, in excess of the reinvestment required to maintain share. This excess need not, and should not, be reinvested in those products. In fact, if the rate of return exceeds the growth rate, the cash cannot be reinvested indefinitely, except by depressing returns.
Dogs (Pets)
Products with low market share and slow growth are “pets.” They may show an accounting profit, but the profit must be reinvested to maintain share, leaving no cash throwoff. The product is essentially worthless, except in liquidation.
Question Marks
Low market share, high growth products are the “question marks.” They almost always require far more cash than they can generate. If cash is not supplied, they fall behind and die. Even when the cash is supplied, if they only hold their share, they are still pets when the growth stops. The question marks require large added cash investment for market share to be purchased. The low market share, high growth product is a liability unless it becomes a leader. It requires very large cash inputs that it cannot generate itself.
Portfolio
The need for a portfolio of businesses becomes obvious. Every company needs products in which to invest cash. Every company needs products that generate cash. And every product should eventually be a cash generator; otherwise it is worthless.
Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has:
• stars whose high share and high growth assure the future;
• cash cows that supply funds for that future growth; and
• question marks to be converted into stars with the added funds.
• Pets are not necessary. They are evidence of failure either to obtain a leadership position during the growth phase, or to get out and cut the losses.”
Looking at the Gentailer’s gensets then, where do they fit?
I would put the coal-based gensets in the Cash Cow quadrant at present. They are written down, have a low cost of coal supply and are talked about as if they have long horizons. But I believe all that is about to change.
My prediction would be that carbon emissions risk will be ever more priced by the financial markets leading to non-financing of upgrades, earlier than planned closure, remediation costs brought forward and significant asset impairment.
Further I would not expect to see any government bailouts – the companies have known since at least 1997 (the date of the Kyoto Protocol) that carbon emissions carry risk. Company Boards have surely debated and chosen their pathways carrying the risk appropriately. Compensation will be lobbied for but is not warranted.
Gas generated electricity has been a long-term great business for some; for others an opportunistic business while the gas price was low and demand growth high. Again, all this is changing particularly driven by the LNG export business. Origin Energy is being increasingly looked at as an upstream and LNG company.
So where are renewables? The question mark box for sure! Let’s remind ourselves of what Henderson says:
Question Marks
Low market share, high growth products are the “question marks.” They almost always require far more cash than they can generate. If cash is not supplied, they fall behind and die. Even when the cash is supplied, if they only hold their share, they are still pets when the growth stops. The question marks require large added cash investment for market share to be purchased. The low market share, high growth product is a liability unless it becomes a leader. It requires very large cash inputs that it cannot generate itself.
To create large renewable energy companies that are throwing off cash for future investments is going to be difficult. Sticking-to-the-knitting seems easier and safer. And yet some of the existing companies are going to try – we should wish them well!
Change is not easy – it never was – finding the pathway to the future in an energy ecosystem is tricky but to me it has become self evident that:
If – Incumbency is the capacity of a system (at multiple levels and scales) to resist disturbance in order to retain its basic form and function and the immune response is the capacity of an entity (individual, business unit, firm, market segment) to protect itself from change:
Then – pathways to a renewable energy future lie not only through the invention, road-testing and injection of innovation but also through the creation of new symbiotic entities – hybrids of the past and the future. Incumbents (at multiple levels and scales) must see that they at least have a chance of success that innovation brings.
Catalysing such pathways can be thought of as providing the “activation energy” to overcome resistance, enrolling many players to bring up the base of understanding and changing the feeling of precariousness felt by incumbents into a feeling of opportunity.