When it comes to energy, the question of sustainability is always looming. Not only is it important that resources provide enough energy to meet our daily needs—heating our houses, powering our cities, and running our cars—but it is also important to consider how our energy resources will be able to be utilized in the long term. While we find our coal and oil reserves depleting year after year, renewable resources, such as wind and solar will practically never run out. Not only are renewable resources abundant by nature, but they are clean energy, meaning significantly less pollution and greenhouse gas emissions. With rising global temperatures and the exacerbated effects of climate change, the consumption of clean sustainable energy has assumed its place at the forefront of global discussion and resolution formation.
With the understanding that fossil fuels exert a heating effect over the ozone layer, inciting atmospheric degradation, our world has recognized the need to collectively lower greenhouse gas emissions. This includes making necessary changes in the way energy is consumed in order to prevent irreversible climate damage. Thus, an energy transition has become not only pertinent but inescapable. World leaders have recognized this and have begun taking measures to decrease their C2 emissions through decarbonization efforts. By making strict environmental commitments and net-zero pledges, 64 countries (accounting for 89% of global COS emissions) along with large financial institutions and enterprises are making drastic changes to their business models and how they operate internally to accommodate the new energy future. Unpacking the current trend away from fossil fuels and the move to renewable energy is essential in understanding the future of resource conservation and the necessary facets of this new energy future.
As countries aim to reach ambitious decarbonization targets, renewable energy—led by wind and solar—is poised to become the backbone of the world’s power supply. McKinsey estimates that by 2026, global renewable-electricity capacity will rise more than 80 percent from 2020 levels (to more than 5,022 gigawatts)[1]. Of this growth, two-thirds will come from wind and solar, an increase of 150 percent (3,404 gigawatts). Furthermore, it is expected that by 2035, renewables will generate 60 percent of the world’s electricity.[2].
With renewable energy sources becoming the main source of energy in the future, a global race has begun to build the largest fleet of solar and wind operations. Currently companies are increasing capacity to try to catch market share in the expanding market of renewables around the world. With increasing demand and capacity constraints, there is increased pressure on developers to execute efficiently along with heightened competition for finite resources. With such a newly heightened and competitive environment, there is bound to be winners and losers within the space until further consolidation. Thus, in order to recognize which companies will have a competitive edge in certain renewable spaces. It is helpful to build an understanding of important criteria when looking at such companies.
The first item of importance is exploring companies with value-chain excellence. This means that a company has existing methods of planning and operations management to deal with accounts of variability in their value chain. They develop a risk approach to minimizing costs of plan delivery, establish tools for path planning, and reconcile actionable items against mishaps and corrective items. An example of this would be differentiation in project origination and development as renewable companies gain tracks of land.
The next component would be seeing if a company has an economy of scale and skill. With the rapid scaling of the renewable industry, it will be crucial to determine if companies have the allocated resources and human capital necessary to scale quickly and efficiently. Not only is an efficient operating model important, but also important is asking does the company have the right financial backing, investors, capital structure? Or does their leadership have the qualifications and experience to be able to quickly scale a renewable operation?
The last important factor would be companies with an agile operating model. With the tech savvy and innovative culture of the renewable industry, companies are constantly finding ways to improve or change operations in the shifting geopolitical environment. With that being said, quick changing and agile operating models are critical factors in finding innovative ways to produce high-performing, quick revolving value chains that will enable businesses to quickly shift resources and respond to changes in the landscape. [3]
Overall, the new green wave towards sustainable energy sources will inevitably come to fruition. The only question is how quickly will it surpass fossil fuels and which companies will be left standing on top. As the movement continues to move forward it is important to look at the internal operations of high performing sustainable energy companies to see if they have the right foundation to mold to the changing environment while having enough resources in place to outpace others.
Jeff LaBelle
Author
Sarasota Advisor
[1] Global Energy Perspective 2022, McKinsey, April 2022
[2] Global Energy Perspective 2022, McKinsey, April 2022
[3] Renewable-energy development in a Net-zero world, McKinsey, October 2022
