The response of incumbent utilities to the challenge of renewable energy

Book chapter, 2014

Renewable energy sources such as biomass, wind and solar power are relatively new means of generating electricity. Until recently, electricity was typically dominated by fossil fuels (coal, gas and oil), large-scale hydro and nuclear power in centralised systems of very large, GW-scale generation units. In contrast, new renewable power is typically built in smaller units and can attract investors outside the traditional circle of utilities and industrial self-generators.1 Whilst renewables rely heavily on public funding to support their further development and deployment, they are becoming more competitive with traditional electricity generation technologies and can seriously affect their profitability, even their survival.2 Together these factors mean that incumbent utilities (i.e. major companies that dominate conventional electricity production) have been forced to respond to something we refer to as the ‘renewable challenge’. Since the 1990s, when many European electricity markets were ‘liberalised’, there has been a trend towards further market concentration. This means that some incumbents are now among the most highly capitalised companies in the world.3 Prior to liberalisation, many European utilities had close links to the state via public ownership and via sub-national or national monopolies. Utilities were seen as a key infrastructure industry and offered career opportunities to former political leaders and bureaucrats. Hence one would expect that utilities could face the renewable challenge from a position of strength. Surprisingly this has not always been the case. Incumbents in Germany and Sweden – the two countries discussed here – demonstrate a wide range of responses to the renewables challenge. In this chapter we analyse utilities’ responses to the renewable challenge using the reactive-defensive-accommodative-proactive scale as popularised by research on Corporate Social Responsibility.4 By responses, we refer primarily to incumbents’ ‘nonmarket’ strategies for dealing with renewables. Generally speaking, nonmarket strategies are typically those that seek to influence “the social, political, and legal arrangements that structure interactions outside of, although in conjunction with, markets and private agreements”.5 Since public policy is a major determinant of market opportunities related to renewable energy, we focus particularly on incumbents’ attempts to influence renewable energy policies. However, in some instances we describe how incumbents have sought to influence renewables through court cases (legal arrangements) and the media (social arrangements). We trace incumbents’ nonmarket strategies in Germany and Sweden through time to show that responses to the renewable challenge vary according to different social and political contexts.