Energy is the buzz word du jour. Talking about energy is not a new concept. Certainly, ‘energy independence’ has been a buzz phrase for decades. And yet now, energy is always accompanied by other modifying word accoutrements: solar energy, bioenergy, hydroelectric energy, clean energy and the list goes on. Later in the post we can add a few complexities back, but for the moment and for the sake of clarity, let’s make it simple. Energy, no matter what the source is, is utilized to create output. Think about it like this: why are you happy when you have a lot of energy or when you wake up feeling energized? Or, why does it bother you if you don’t have a lot of energy (otherwise known as being tired or burnt out)? Why is the ensuing move a trip to the store to get a caffeine jolt or an energy drink? The answer is that having energy and having access to energy directly affects your ability to get things done; to produce. Looking at it through this lens gives us insight into the energy industry, who or what really drives it (and why), and how to stay ahead of the game.
There are multiple drivers in the industry but the three main ones are: government, the private sector, and the consumer. Spoiler alert: the consumer is the most important driver. Nevertheless, understanding why the two others fall short is just as important. Seyi gave a talk on this at the Booth School of Business a few weeks ago and his slides are below.
As in most industries, the government’s involvement is a mixed bag because it needs to both regulate the industry while also attempting to incentivize the private sector to invest in the energy sector. This invariably creates conflicting policies and requirements. For example, the government wants to reduce its spending, increase access to utilities for citizens, bolster private sector spending (thus generating tax income), and assuage the sensitivities of the climate change and sustainability proponents.
As for the private sector, any development or funding from them will be focused on finding new technology that can change or even redefine the game altogether. The desired end result, of course, is profits which will provide wealth to investors. On one side you’ll have the Khosla’s of the world with portfolios full of energy ideas that are attractive to investors and consumers alike, but high on the technical risk side. On the other side stands the Old Guard – Big Oil – which will work hard to disrupt themselves (think fracking and exports of petroleum products up 150% in three years) while simultaneously ensuring they maintain a stranglehold on our wallets. And, amid the innovation and reinvention, there will continue to be issues with business models that lead to subsequent setbacks. Solyndra and Better Place are poster children here.
Then, there are the consumers. Ultimately it is always about the consumers where energy is concerned, because people will always need and use energy to power their lives. Even the industrial and transportation sector use energy for the purposes of manufacturing and transporting goods and services that serve the end consumer (you and me). Only the companies that understand this and take it to heart (and to their strategy meetings) will succeed in marketing and catering to the main driver – the end consumer.