Supply and Sustainability: Piecing Together the Energy PuzzlePublished: July 14, 2010 in Knowledge@Wharton
The global energy sector is at a crossroads. Key issues such as a lack of energy independence, the security of energy supplies, and climate change have become important items on the agendas of governments everywhere. This has sparked a heated debate about the most appropriate energy mix in those countries that are considering the use of nuclear power and renewable energy, and in companies that are committed to tackling climate change. These issues were discussed during a panel session on the future of energy at the recent Wharton Global Alumni Forum in Madrid, moderated by Stephen J. Kobrin, professor of multinational management at Wharton.
Participants on the panel included executives from several companies that have invested significant resources in renewable energy technology: Carmen Becerril, president of Acciona Energía, a global leader in renewable energy with a presence in eight different kinds of clean energy; Amparo Moraleda, COO of Spain's Iberdrola International, which owns Scottish Power, the electricity producer; and Lady Barbara Judge, president of the U.K. Atomic Energy Authority, which specializes in nuclear research and in dismantling British nuclear reactors that can no longer be utilized. Other participants in the debate were Oscar Fanjul, chief executive of Omega Capital, an investment company; and winemaker Miguel Torres, president and chief executive of family-owned Bodegas Torres.
Changing Positions about Nuclear Energy
The United Kingdom has launched a plan to modernize all of its nuclear power plants over the next two decades. One of the people promoting this process is Lady Barbara Judge, who emphasized the change in perceptions about nuclear energy that is taking place in numerous countries around the world. Although Spain is an exception, countries such as China, India, Turkey and even Switzerland are planning to build or reconstruct nuclear power plants. What kinds of issues do governments and populations need to think about in order to carry out such initiatives? Oddly enough, noted Judge, nearly all of the areas that need to be focused on begin with the letter "p" in English, starting with the word "politics." "Political parties [in each country] need to be in agreement when it comes to deciding the use that will be made of nuclear energy. Nowadays, whether or not to use nuclear energy is a political question, but it shouldn't have to be that way," Judge said.
The next issue to resolve is where to locate those nuclear power plants. In her experience, said Judge, people do not worry about living near a nuclear power plant because they know that major infrastructure projects mean significant money and jobs. Permits are also required -- i.e., "a good regulatory system for constructing plants, which guarantees that the technology used in the reactors is safe and sound. In Spain and the United Kingdom, we depend on good regulators," she said. Price is also an issue. "You need a lot of money to build a plant, but once you have built it, you can get energy at a reasonably low price, and there is no problem of scarcity in the future."
The one area where scarcity really exists is specialized labor. Nuclear plants began to be constructed during the 1980s when "studying nuclear engineering or physics was something attractive," Judge said. "It was considered a good job, but [construction of] plants later stopped, and those people who got their engineering degrees went to Wall Street to become financial engineers." Now the challenge is to educate a whole new generation of people to work in plants that are challenged by an inadequate supply of specialized "parts or pieces," among other shortcomings.
Another big "p" is the "press." "For a long time, the press has been opposed to nuclear energy because it makes a good news story [if nuclear energy is perceived as dangerous], and because of the influence of politics," Judge said, adding that the press needs to become more transparent. "This is very important in the new world we live in. Six years ago, when I began to work in this sector, 30% of the people in the U.K. [said that they] were in favor of nuclear energy, while 45% were opposed, and the rest had no opinion. Now, 55% of the British population favors nuclear power, while only 30% are against it, and the rest either don't know or don't respond."
Another important concern is nuclear waste. Judge noted that most of it comes from materials used for arms made during the cold war, "but you have to clean it [now], whether you build any new power plants or you don't." A final consideration is what portion of a country's energy portfolio should be devoted to nuclear energy. "While nuclear power is not the [entire] answer, it is part of the answer. We cannot rule out anything. When I began to work in the U.K., 20% of [our] energy was nuclear. If we continue to dismantle plants and not build new ones, by the year 2020, nuclear power will represent only 2% of our energy, the same percentage as in Spain."
What is needed is gas, coal, petroleum and renewable energy, Judge said, although these kinds of energy are not enough to solve the challenge of scarce resources and lack of energy independence. "We also need nuclear energy; [a rate of] about 20% to 30% would help." She called for politicians to change their views about nuclear energy, and to reconsider its importance and the role it should play in the current energy environment.
Renewable Energy: Part of the Solution
"We have always been firmly convinced that we are part of the solution, but we need to be more aggressive about percentages than the 20% or 30%" proposed by Judge, said Carmen Becerril, president of Acciona Energía in Madrid. In addition to the challenges of energy dependence, climate change and geopolitical weakness, there is a fourth problem facing countries, which is that "1.5 billion people around the world do not have access to commercial energy. Forecasts from the International Energy Agency say that this number will most likely grow between now and 2030. We have to find solutions to these problems."
One component of that solution is renewable energy, Becerril noted. "Among other things, that's because fossil fuels have a finite character, by definition, and because renewable sources help to combat climate change. There is a reasonable consensus that we must guarantee that -- by the year 2030 -- growth in emissions does not increase the temperature of the earth by two degrees. This defines how we should structure energy consumption."
Energy sensitivity has been catching on in several countries, Becerril said. Europe's commitment to renewable sources is manifested in "the equation of the 20s. That is to say, by 2020, they hope that 20% of the energy in Europe will be renewable in origin, and that energy consumption is 20% more efficient [than it is today]." The trend we see now is that "renewable energy is becoming more and more reliable in Europe, and awareness about these sources of energy is growing in other geographical locations, especially in the U.S. The problem of the [oil spill in the] Gulf of Mexico probably will strengthen this perception."
Becerril noted the debate about the subsidies that the Spanish government provides to suppliers of renewable energy -- a situation that is very controversial. "Spain has an energy dependence rate that is 26 percentage points higher than the rest of the European Union," she said. "That rate has fallen to 78% from 82% in just the last three years as a result of the penetration of renewable sources."
In addition, renewable energy sources in Spain replaced three billion euros worth of energy imports last year. "The inflationary trend of our economy is directly linked to the price of petroleum, so renewable energy helps us disconnect our macroeconomic position from the risk of volatility in the price of fossil fuels. It has also enabled us to fulfill our international commitments to reduce greenhouse gas emissions, and work together to save a very significant amount of money -- more than 400 million euros -- by selling rights to emit CO2."
Has it been worth it for Spain's companies to promote renewable energy such as wind and solar power? "Most definitely, yes," Becerril said, adding however, that renewable energy sources are not the entire solution, only a part of it. In Spain, the goal for 2020 is for 22.7% of total energy consumption to be renewable in origin. Some feel this figure could reach 50% by 2030 or 2040."
The Importance of Regulators
According to panelist Oscar Fanjul, CEO of Omega Capital, governments have made the energy sector an essential component of their foreign policy. The key questions for the energy sector today are supply chain security and climate change. With regard to climate change, Fanjul stressed the differences in the approach taken by developing nations and industrialized ones. Developed countries are ready to pay for energy that does not pollute, but developing countries are not prepared to do so, he stated. "Developing countries will continue to use energy that pollutes because it is cheaper and it will continue to be available."
Fanjul favors the use of renewable energy and the goal of compliance with the "equation of the 20s." However, he noted that there are major problems with this sort of energy: its decentralization and the intermittent quality of its supply (for example, of sun and wind). With these types of energy, he said, "The regulator is an extremely important figure," the person who determines the capacity of renewable energy and its structure. "At the moment, there are subsidies because there still isn't parity in the network" -- i.e, countries still have not reached the point where renewable energy sources are competitive with fossil fuels in the absence of governmental assistance.
One of the challenges facing regulators is to distort competition as little as possible, said Fanjul, while also securing the efficient use of investment in this type of energy. Regulatory systems must be improved, and large amounts of money will need to be invested in order to cut the cost of these renewable sources so they can achieve parity with networks of fossil fuels, and be competitive with them.
Panelist Amparo Moraleda emphasized the need for governments to intervene in order to create a more favorable environment for an energy revolution, "which cannot wait because reserves of crude oil and coal will only last some 40 more years." According to Moraleda, countries must be able to rely on effective legislation, and they must develop proactive governmental policies. He also urged "the introduction of incentives that enable new technologies to develop, and to provide support for R&D and clean technologies, as well as to regulate sources [of energy] that are not clean."
In order for renewable energy to be totally competitive and the world to fulfill the goals of 2020, Moraleda noted, "we will need to invest in infrastructure that can integrate all of these energy sources in our portfolio. You need [energy transmission] lines, systems of transportation and intelligent networks." He added that renewable energy sources remain expensive because they cannot be made on a large scale, and so government assistance is still needed. To carry out this energy revolution, energy efficiency must be achieved through the quality of supply and sustainability.
The Entrepreneurial Point of View
For winemaker Miguel Torres, energy is a very important topic. Conventional energy methods produce two kilos of CO2 waste during the production of an average bottle of wine. "This industry is worried about climate change because vineyards are extremely sensitive to heat. If you raise the temperature of the land by [just] one or two degrees [Centigrade], there will be a drastic change in the vineyard's 'D.O.' ---- its official product classification -- compared with what we have today." In other words, the wine produced on that plot of land will change significantly in character.
On the other hand, although ecology has always had value for the Torres family, they only decided to take action after seeing Al Gore's documentary film, An Inconvenient Truth. "We thought that we had to do something quickly," Torres said. So over a period of five years, his company has spent 10 million euros on renewable research and development, including the construction of underground wine cellars. Other initiatives to achieve greater energy efficiency have included decreasing the weight of its bottles to reduce their carbon footprint. "In some Scandinavian countries, our wine is even packaged in Tetrabrik [cartons] although I don't like that," he noted. His next challenge will be to use biomass to reduce his electricity bills.
"This is the time for change," he said, adding that consumers are putting more and more pressure on companies to become environmentally minded. Moraleda agreed that consumers are becoming more environmentally aware, which is leading to changes in the way companies are operating. "Environmental efficiency and awareness is a key factor that differentiates companies, and there will be some that are distinguished [from their competitors] because of it."
Who will pay for these changes? According to Moraleda, it will be a collaborative effort between the public sector, the private sector and consumers. At the end of the day, added Becerril, "we consumers will have to pay for the effort" of complying with the European norms for 2020 and other initiatives. "We want perfect energy, and companies need money to make these investments."