Embrace the future and recognize the growing demand for a wide range of fuels or Ignore reality and slowly?but surely?be left behind. ” -Mike Bowl, chairman and CEO of ARC (now BP), speech In Houston, 9 Feb. 1999 As the quotation already clearness alternative fuels are necessary to support our energy demand. This paper will focus on one of the alternative fuels, namely: wind energy, within the Dutch market with special focus on innovation.
Innovations will include product, process, transaction and business model innovations as defined by Jacobs (2007). In order to be able to study the market and the corresponding innovations we took Noon as focal company to represent the main actor in the industry; the energy producer/supplier. This will help us answer our main question: How important is innovation in the wind energy market? In order to be able to answer this question we had several interviews with different players from different positions in the market and used different scientific models to assess the power balance in the market and the driving force to change/innovate.
After assessing the most important lessons from these models we will come up with a conclusion on the importance of innovation in the wind energy market. Although we tried to give an complete view, we couldn’t include all information we found due to restrictions in time and size. In our research we primarily used interviews (both direct and indirect) to get specific data from companies. We succeeded to interview the most important actors in the industry, with exception of the Dutch parliament. Interviews were taped, Issued, translated and included in appendices.
In this process of issuing some simplifications had to be made to create a coherent image of the interview. Next to Interviews we used secondary data mostly from Internet. Main sources here were CBS. Nil (for statistics), AWE. Org (windmill branch association) and noon. Com. These secondary sources enabled us to get an additional view on the data we gathered. Market description The Total energy market In Holland demands 119. 226 AWG per year (CBS, 2008; also In appendix Definitive numbers durable Electricity 2008). Just a small part of this energy demand Is fulfilled by renewable energy sources; about 7. % (8. 988 AWG), In the renewable energy sources there are two large segments biomass and wind energy, together they control 98. 4% of the market for durable energy. Wind energy total demand for energy and is the market we will conduct our research in. We will look at it from the perspective of the energy producer and supplier. Major trends Since energy production from wind started in 2006 at sea, it took a larger portion of the wind energy production every year, although the growth is declining. (CBS, 2008) In the years since 2000 the capacity of wind energy has grown a average of 18. %. In the recent 5 years growth has slowed down to an average of 13. 3% with a clear decline in growth in capacity in 2009 of Just 3. 8%. This could be an consequence of he financial crisis, since there is a clear decline in the investment in windmills, as can be seen in a decline in extra rotor surface and the decline of turbines in operation (CBS, 2008). This may be caused by a decline in the ability to finance investments, although other reasons can’t be excluded, such as change in subsidies, since subsidy regimes change a lot (interview Noon/Province/Energy valley).
Other possibilities are lower oil prices or a changed subconsciously. A recent development is decreasing costs. The previous decades the costs for wind energy have decreased by five percent each year. The expectation is that this recent trend will persevere. Expectations are that in 2020 the costs for wind energy on land comes approximately equal to the expected market prices of electricity (www. Olin. Org). Another trend is the size of the turbines on the market. Turbines are becoming larger (CBS. Nil/interview Noon/interview province) and they are able to generate a higher turnover.
For the coming years the it is expected that there will be wind turbines placed of five MOW or more (www. Olin. Org). Because wind turbines are becoming larger, the distance between the wind turbines has to increase to be able o maximize the use of the wind. Also important is the restructuring and up scaling of wind turbines. At the moment there are a lot of dispersed wintriness, government policy is that they have to be clustered and sometimes these new turbines have to be of a minimum size (interview Noon en Province).
Since windmill space on land is limited (interview Noon en Province) windmills are now build in the water, near land, such as the windmills near Ark (interview Noon), because there is a lot of space available on the water (interview province). In this way fewer people are affected. (interview Noon) Furthermore, many energy companies are merging. Yet we do see some small ones start up, like the Dutch Energy Society (MEN) and Green Choice. Trends often follow Government policies (interview Noon).
This is the same for the presumes, consumers started producing electricity after the liberalizing of the energy market, but government policies do not only influence energy suppliers and providers, but also from wind energy and prioritize it so it prioritize durable energy (interview Enemies). Competition Before 2004 no competition (between companies) existed, but since the government liberalized the energy market it does. The liberalizing of the energy market means civilians can now chose their energy supplier themselves, creating a new significant force to reckon with for energy providers and -suppliers (consensuses. L). It also meant that energy providers and suppliers were separated from the grid transmitters. The government protects consumers from potential dangers of the liberalizing of the energy market by means of the Merrymaker (a subdivision of the Netherlands Undemanding Authorities) (consensuses. Nil/ receivership. Nil / interview enemies), who also try to increase market functioning. The government did this in order to enable more free choose for customers and in an attempt to increase the quality of services and lowering the prices. (receivership. L) This liberalizing has had severe consequences for energy providers and suppliers. Several energy companies merge, creating large players on European level, such as ERE and Evidential (e- marketers. Com). This would lead to a oligopolies market. But on the other hand new (small) companies, such as the Netherlands Energies Marksmanship (Underprivileged. Nil) rise, leading to a more perfect competition. So the direction of he market is unclear. However a count from unregistered. Nil showed 28 energy providers, substantial more than the 15 in 2004 (Wisped; see appendix timeline energy industry).
Later; in the chapter about critical success factors we will discuss what factors provide competitive advantage. Co-operation Co-operation is about working together. Working together can take many forms, one well known form is the strategic alliance. Strategic alliances within the energy market are not very common, and research suggest that energy companies are not inclined to work together; they like to be autonomous(strategy academy). It may be for this reason that takeovers do occur, moreover because energy companies state they search for economies of scale globally (acne. L / strategy academy). Competitors In this chapter we will identify some of Nouns competitors, and some alternatives of wind energy in general. Other suppliers of energy we found are Assent, Nonce, Netherlands Energies Mathematical (MEN), Greengrocer and Xiii. Some of them try to convince the customer to switch by lower prices, although these prices are sometimes only for the product electricity and therefore exclude the transportation cost (Interview Noon). The price fighter parties are gaining position since the liberalizing of the energy market in the Netherlands (fiddlesticks. L). Substitutes In this paragraph we will comment on substitutes in the same market as the wind energy market, which we consider to be the market for green energy; a subdivision, of the energy market in general. Noon faces some external influences that are related to the wind energy market. One of the most commented on in our interviews is solar energy. Solar energy is recently receiving positive attention in the media. Demands, like Elmer-city. The solar-island created to do so is the third greatest in he world (durable-inerrableness. Nil).
In the Netherlands, solar energy has difficulties to bring a substantial part of the power supply, as not a lot of space is available. This is why big energy providers like Noon favor wind energy (Interview Noon). Furthermore there are some difficulties to get the low voltage, solar energy generates, on the high voltage grid, while this is easier with wind energy (Interview Darwin). It was also commented often that solar energy will be profitable against market prices as soon as 201 5 and that solar energy and wind energy are good complements.
So wind energy has little to fear from its largest green substitute. Critical Success Factors Critical success factors specify what a company needs to be good at to be successful in serving a particular market. These can be split up into minimum success factors (MS) and key success factors (SF). Minimum success factors are the minimum requirements to be competitive in an industry, key success factors exist of elements in the customer value proposition on which a firm can distinguish itself from competitors (strategic business planning textbook).
Similar concepts can be observed n Slacks “operations management”, here they are called order winners and qualifiers. Slack states that the product/service life cycle influences performance objectives. For every stage in the product life cycle other qualifiers and order winners are important. Performance objectives are: speed, reliability, quality, flexibility, dependability and costs. (bal 72, Slack, 2007) The success of survival for Noon in the wind energy market is mainly based on two factors; reliability and prize.
One important factors winning customers and keeping them with the company is the reliability (interview Noon). Several cases show that people switch back to their reliable and well known energy supplier after having trouble with the new energy company (interview Noon). Most people switch energy company because of the price differences, explaining the success of companies like Netherlands Energies Mathematical and Greengrocer, who focuses on low prices.
Other energy companies try to differentiate themselves by offering a focus on green energy, like Assent. (interview Noon). So critical success factors for Noon are to be reliable, to gain and to maintain their customers, and to offer a prize that is balanced with the quality of its products and arrives. However critical success factors are not the same for al activities of Noon. Offering a good price is important in all core activities, being reliable however is only important for the energy provider and energy supplier activity of Noon.
This since the energy trader is a player on a stock exchange wherefore it is able to offer energy to the market whenever it pleases, without repercussions from the side of the customers. Possibly surprising to many readers is the fact that being “CO neutral” is not a critical success factor. Reason for this is that competition is taking place in he market for green energy, being green is not a distinguishing factor. In this chapter we explain the positioning of Noon wind energy using Porter’s Generic Strategies and the impact it will have on the type or direction of innovations.
A firm’s generic strategy describes, in broad terms, how it positions itself to compete in the market it serves (p. 379,Bespeak 2010). To position Noon in the Generic Strategies model, we first of all describe the strategic profile of Noon. Noon is now 49%-owned by the Swedish company Evidential, which will be raised to 100% in the coming years. Last year, in September 2010, Evidential announced its ewe strategic direction with a geographical focus on three core countries: Sweden, Germany and the Netherlands.
This strategic direction is focused on four pillars: Greater focus on profitability and value creation Focus on core markets Three main products – electricity, heat and gas Reduced CO exposure and growth in low CO-emitting energy production including gas In the annual report of 2010 the mission statement of Noon is to be an inspiring energy company that creates lasting value and growth by setting new standards. They aim to do so for all their stakeholders, including shareholders, customers employees, as well as society at large.
Furthermore they aim to be an international, integrated energy company, which achieves financial results that allows them to achieve first quartile results within the sector. They want to grow within their market, however they clearly remark in the annual report 2010 that this is not the most important aspect in their strategy. This can be typified according to Anions as a market penetration strategy. (Ezekiel]k. Info. Nil) Towards the customers they want to be a reliable energy advisor, which goes hand in hand with the ambition to become a deader in the reduction of CO emissions.
Last but not least, Noon wants to be an attractive employer for both their current and future employees (p. 9,annual report 2010). As producer and supplier of a basic necessity such as energy, Noon sees it as their responsibility to ensure that energy remains affordable for their customers. Doing so implies striking a balance between the costs of producing energy and the environmental impact by replacing older units with more efficient technology and developing renewable capacity, thereby lowering the total emissions of their production park.
When it comes to their customers, they have elected to focus on energy-saving services and products. This because studies have demonstrated that an average household wastes 30% of its energy consumption. Therefore Noon feels only concrete tips and personalized advice, but also offering the customers help in the realization of energy-saving measures in their homes. (p. 10, annual report 2010) Now we have shortly described the strategy of Noon we come to the conclusion that the position in (Porters) generic strategies model fits in the section, broad competitive scope and tries to get a competitive advantage with higher costs.
Noon is focusing on broad energy users and tries to reach them with special services like energy-saving services and products, this to differentiate from their competitors. These special services are extra investments, which brings Noon in the right section above, which is illustrated above. Because Noon is in this section, we believe the innovation will be especially focused on services for customers. This is in our prospect the solution to clearly differentiate from their competitors with a commodity product. Another way to position Noon based on his strategy is using the indifference curve.
The indifference curve illustrates in a simple model the consumer behavior, that he will purchase a product only if the product’s consumer surplus is positive (p. 367 Bespeak, 2010). When we take a look at the figure below the page, we have positioned Noon and Assent on the indifference curve, which means that the firms have achieved consumer surplus parity, meaning consumers have identical preferences and firms are offering the same amount of consumer surplus. (p. 368 Bespeak,2010). We have positioned Noon higher because of the extra quality services they offer and higher prices.
Notice that MEN is not placed on the indifference curve. This is because the energy company is offering its energy product with a much lower price, however consumers are also giving negative arguments about MEN, reducing the quality of the product. Greengrocer however is more successful. It is at the moment one of the less expensive energy companies in the Netherlands with a good quality, based on customers satisfaction. (switched. Nil/goddesses- inerrableness’s. Nil/coverage. Nil). Outside the wandering industry Noon also competes against other products due to substitutes.
A model to describe the profitability of the wind energy industry is Porters five forces model. This model ascribes five factors (threat of substitutes, threat of entrants, internal rivalry, buyer bargaining power and supplier bargaining power) that influence the profitability of the industry. Since a clear picture is presented above of the rivalry within the industry by using Porters generic strategies and the indifference curve models this section will only deal shortly with the four peripheral factors. The most interesting, and strong threat, is the threat of substitutes, why is explained below.
Threat of substitutes includes companies that supply other green forms of energy, like solar energy, or energy produced from biomass. Wind energy does not compete with (and is neither a substitute of) “grey’ energy since customers already showed that they are willing to pay extra for green energy and therefore buy on another market. Although companies producing these forms of energy pose an threat to the profitability of the energy market, the source doesn’t. In interviews with Noon, Darwin, Enemies, SST wind and the province it got clear that these energy sources are moment during the day and therefore fulfill other demands.
Since the products are almost not differentiable and switching is easy, threats of substitutes are high. Threat of entrants in the wind energy market is limited, since it is quite a capital intensive industry and requires specific knowledge and contracts. Moreover, the industry is (still) only profitable due to subsidies from the government (Darwin, province, SST wind, Noon). Since it is hard to get these subsidies, and they take a long term to acquire (interview province) entry barriers are high. Supplier bargaining power is also limited. Suppliers are the companies selling windmills.
Since orders for windmills are irregular and large, and there are several windmill suppliers, supplier power is limited. Trust plays a large role in the market for windmills, even if a company is selling a good windmill at a good price, chance that they get chosen, when new in the industry, is small (Interview Darwin). Buyer bargaining power is limited. Customers are doing repeat order, based on contracts, these orders are done mostly individually and are almost never of significant size to Noon. Nevertheless customers are price sensitive and can easily switch between energy companies.
Industry framework An industry framework describes how an industry is structured. The framework below shows the market for wind energy in Holland. In order to be able to produce a coherent clear picture we had ignore some details. We described the industry framework in two ways; from a process perspective as one can find below and from a relational perspective, which is available in a appendix (industry framework: a relational perspective) The framework is viewed from the perspective of Noon; our focal actor. Noon generates and supplies electricity to their customers.
In the process of doing so they encounter various companies, on which we will elaborate below. We identified four categories of flows; products, money, information/influence and laws. In order to clarify the figure, we used different colors to display these flows. Sizes of arrows do not indicate anything specific, since relations are kept on different grounds and therefore vary widely in size. Wind energy value chain As stated above, Noon generates and supplies electricity to their customers, but they are not allowed to deliver it themselves since the liberalizing of the energy market in 2004 (RI]shivered. L). This created a new player in the wind energy value chain; the Grid transmitters. They can be divided into two groups, national and regional. At sectional level there is only one party, Tenet. They deliver high voltage electricity medium voltage energy and distributed further to the customers. Everything up from the transformation station is owned by regional grid transmitters as Enemies (interview Enemies). Several other relations can be identified in the wind energy value chain.
In essence the relation is from Noon to the customer, with the Grid transmitter enabling this relation. Noon uses ads and other sources of influence, to influence choices made by (potential) customers. When people become customers they pay Noon for he electricity as well as the transport, which is different for some other electricity suppliers (interview Noon, Enemies) Part of this money is then passed from Noon to the grid transmitters. Building windmill parks In order to be able to generate and supply energy to their customers Noon has to build windmill parks.
To build windmill parks they can either try to convince governments of the use of an windmill park and get orders in this way, or they can take part in tenders set up by different governments, depending on the size of the project. (interview Noon) Aside from how the project gets to Noon, they first have to iscuss it with all the stakeholders (civilians and other stakeholders) involved, mainly to ensure nature and environmental organizations do not start procedures to stop the company getting the required permits. Interview province) This can take several forms, it can be participation evenings, or communication through innovation platforms, who seek to influence governments, civilians and nature and environmental organizations. In order to be able to profit from this service, Noon has to be a (paying)member of the innovation platform. Funds for the platform also come from the government in the form of subsidies. When the government gives the permits several other parties come to play (this might be the other way around in other cases). As can be seen in the image, there is a block called wind energy development.
This is a consortium that sells a turnkey windmill park to the energy supplier. (interview Darwin) A example of this is the FLOW consortium. (acne. Nil) When they constructed the windmill park en handed it over to the energy producer. The energy producer has to pay rents for the land they stand on and taxes for the income they generate, so money also flows back to the government. Governments Lastly Noon holds strong relations with different governments, mostly with national or lower level governments. At these levels Noon tries to influence the government to build windmill parks as stated above.
Governments provide subsidies and laws in order for this process to succeed, since wind energy is still to expensive to be paid fully by the market. These subsidies can also be granted by higher governments, such as the European Union. Business Model Noon Business Models are systems by which business can sustain themselves and can achieve their corporate purpose, mission and strategy. It is a description at a tragic level of the way an organization creates, delivers, and captures economic, social, or other forms of value. Noon is most known to customers as a company that provides their homes or businesses with electricity or gas.
It is the energy provider/ – supplier of with more than 2,6 million customers (businesses and consumers) in the Netherlands and Belgium and employer of 6. 000 employees. (Annual Report Noon, Next to supplying, Noon is also active in generating electricity, like with gas/coal power plants and, of our special interest, wind farms. Nouns total electricity production is 1 Two with an durable production of 1. 67 AWG. Aside from supplying energy Noon also helps customers saving energy, in order to build a long term relationship with her customers (interview Noon).
Noon sees providing energy, generating energy and trading energy as its core activities. With these activities the company generates a turnover of ?5. 459 million and a net profit of ?563 million in 2010 (Annual Report Noon, 2010) . On the 1st of July 2009, the Swedish company Evidential took over Noon. Interesting fact is that Evidential is leading in the field of energy generation from wind turbines on sea according to its website (evidential. Mom). Through the acquisition, the companies together have become number one in the field of wind energy (nova. Nil). The acquisition also affects the structure and strategy of Noon.
This is evident from the following case, in which energy concern Evidential decided to economize and downsize (September 2010). By doing so the company tries to reduce their operational costs by 648 million Euro. This has a direct effect on the structure of Noon where the plan for this year is, to redesign the organizational structure and to replace it with a business-driven organization. With this redesign the focus will be ore on profitability across the entire Evidential organization, including Noon. Moreover it enables Noon to be more effective in achieving more sustainable energy and lower CO emissions.
An additional advantage is that the contacts between employees in different countries are strengthened, which supports the learning processes across the organization (p. 7, Noon Annual Report). Fattiness’s new strategy will also include that Noon will no longer remain as a separate subsidiary (mismanagement’s. Nil). This strategy is focused on the four pillars discussed before in “the strategic profiles”, namely: greater focus on profitability and value creation, focus on core markets, three main products – electricity, heat and gas and to reduce CO and exposure and growth in low CO-emitting energy production including gas.
With this new strategy of Evidential, Noon will create value for itself while creating value for its customers. The way Noon creates value for customers and makes money is by offering them the following products, which is scheduled in the next table. Underlain * Production and delivery of electricity * Exploration, production, storage and delivery of gas. Production and supply of heating and cooling * Supply energy saving products and services Bilge© * Delivery of durable production of electricity. Delivery of gas. Europe * Procurement and trade in fuel and electricity in the main European energy International * Trade in oil, coals and emissions ( p. 4 Noon annual report 2010) Listener Phonetics legend Wordbook 1 . Worked 1. Reduce 2. Contract 3. Dwindle 4. Curtail When we take a specific look on Noon’s core activities linked on the Dutch market, the company creates, delivers and captures value in three ways: Energy Provider: Noon has 2,6 customers in the Netherlands and Belgium.
The price these customers are willing to pay are not enough to cover the expenses Noon has to make to produce wind energy, so therefore the government subsidizes wind energy. These high costs of wind energy are mostly caused by the costs of the wind turbines. (interview Noon) The subsidy Noon receives for wind energy is dependent on the energy prices, because they fill the gap between the costs of wind energy and the electricity prices (interview Noon). This leads to variation in the amount of subsidy received, since the energy prices were high in 2008 and dropped again in 2009.
But generally 50% of the price comes from the customer and 50% from subsidy. (interview Noon) The transportation of energy is done by Grid Transmitters, Like Tenet, specialized in plugging wind parks on the ‘High Voltage Net’. After that Enemies or another regional grid transmitter delivers electricity to the end-user. (interview Enemies) Noon bills the use of energy (gas/electricity) and the transportation by the Grid Transmitter combined. “Discounters like Xiii and the ‘Netherlands Energies Mathematical’ only bill for the electricity, so they appear cheaper. Interview Noon) Energy Saving: Although they lose revenue by doing it, Noon advices on how to save energy, for example by using better isolation. Noon thinks this will bind the customer for a longer period to Noon and it will improve customer satisfaction (Interview Noon). Noon also tries to give more insight in use of energy for the customer, through smart meters that show how much energy is used when. Energy Generator: Generating wind energy is not profitable yet. Noon believes that in the future with ongoing technological improvements and rising fuel prices, it will be profitable. In