Noel Botha describes six key factors that characterise successful renewable energy businesses and suggests ways in which emergent businesses can maximise potential and optimise growth. Noel's long-standing experience in guiding emerging businesses through early stages of growth is supported by detailed company-level research, identifying the distinguishing factors for successful businesses in a sector currently subject to substantial investment.
The renewable energy sector is entering a period of high growth, driven largely by government policies. Whilst government policy and fiscal environment are important, they do not explain entirely why some companies succeed and others do not.
Our focus arises from the consensus that fossil fuel consumption is a primary cause of anthropogenic global warming in a world of increasing energy demand. There has been a resultant upsurge in interest from investors looking to benefit from this market. Venture capitalists invest, typically, on a time-scale of 3-6 years; early-stage companies raise capital through listings on equity markets; major multi-nationals also invest, motivated not only by profitability but also benefits from enhanced corporate social responsibility and strategic alliances in a potentially high growth environment.
Figure 1
Factors for success in the wind turbine industry. The inner circle identifies six components for optimising the chances of business success in the renewable energy sector. The outer circle identifies sub-components applicable to the emergent and growth phases of the wind turbine industry.
A detailed study into the wind turbine industry undertaken by Michael Ellis of Orion Innovations suggests that six key factors characterise successful businesses in this sector (Figure 1).
Focused commercial strategy
Businesses with a clearly articulated strategy generally outperform those without. Sound commercial strategy holds priority over even technical excellence and product uniqueness. Products must meet current market needs. Successful commercial objectives tend to be consistent with a company’s core competences and overall business objectives. Clear strategy in conjunction with a detailed implementation plan improves investor confidence, allowing the business to follow an optimal course flexibly.
Vestas successfully focused its commercial activities on the supply of small, technologically reliable wind turbine units when the market desired smaller rather than larger turbines. Concurrently, the Wind Energy Group developed technologically superior but initially much larger units. Market needs were better matched by Vestas and as the wind turbine market subsequently matured, Vestas capitalised on its success adapting its commercial focus to meet the demand for larger turbines. WEG lacking similar success in the emergent market was forced to withdraw despite its technical competence.
'Fit-for-purpose' technology
During early sector growth, it is more important to develop 'fit-for-purpose' technology than focusing on innovative design. As the market matures, technology needs to be increasingly reliable and cost effective. In the emergent wind turbine industry technological innovation did not necessarily result in commercial success.
For example, James Howden & Sons whose innovative turbines suffered from blade failure and gearbox difficulties were unsuccessful (Figure 2) whilst, in contrast, slow, successful incremental development and production of reliable machines from Vestas and Bonus Energy (now Siemens) fared well. Newer entrants to a mature market may, however, need to differentiate products through innovation.
Figure 2
2-bladed 3 MW turbine, Burgar Hill, Orkney, Taylor Woodrow, completed 1987. Operational for a short time before cracking necessitated repairs, the turbine was demolished in 2000.
Sound management, organisation, processes and plans
The success of new ventures is strongly influenced by the capability of its organisation and processes, together with staff roles and responsibilities to adapt to new challenges posed at each stage of growth. The skills and structures required for small start-up businesses are different to those in growth or larger businesses, and smooth transitions between these stages is important.
NEG Micon, with national divisions each having differing levels of autonomy, suffered from poor order control and unnecessary spending on manufacturing for non-finalised contracts. NEG Micon's organisational structure, though suited to the early stages of business development, failed to adapt with growth. In contrast, Bonus Energy have clear processes where manufacturing schedules consistently identify order status, and possess a skill base and organisation allowing it to successfully adapt through business maturation.
Effective supply chain management and quality control
Proactive supply chain management is essential. In the wind turbine industry, blades, gearboxes and castings have proved supply chain bottlenecks, creating problems for companies who outsource component production. Preparing for the transition from prototype to larger volume production by securing good quality components is vital.
Siemens acquired gear manufacturer Flender to supplement its in-house blade manufacturing capability. It then controlled the manufacturing process and quality of essential components. Siemens also took active responsibility for the quality control of other supplied components by developing committed partnerships with key suppliers and investing in co-development activities; technical and quality specifications were assured. In contrast, sub-contractor manufacturing errors for Howden's blade and hub design caused serious turbine failure; Howden only partially recovered the costs incurred.
Success relies on ability to adapt to change
The ability to change the company’s strategic focus as the market matures, or when new geographical areas evolve is key to success.
Clipper Wind Power initially positioned themselves a manufacturer-developer, developing wind farms using their own turbines. However, as component and turbines availability became limiting in the rapidly expanding sector, Clipper repositioned itself to accelerate its novel turbine manufacture whilst entering into framework agreements relating to turbine supply. Vestas, however, failed to adapt to the drop in demand from a single (Californian) market upon which it over-relied, leading to bankruptcy. (Core members reformed as the successful Vestas Wind Systems.)
Access to appropriate sources of finance
The best funding source for the wind turbine industry is unclear. Theoretically, corporate finance is better suited to early stage technologies since investors take a longer-term view than, say, venture capitalists. However, this longer-term strategy is often inflexible and deterministic, hindering the company from adapting to change. Strategic joint ventures or corporate venture funding can, in some cases, be appropriate for emergent technology industries, but ideal funding sources cannot be categorically identified.
The wind turbine industry is a good model for emerging, technology-dependent, renewable energy sectors. These sectors all require substantial capital expenditure, are influenced by government policy and must interface with conventional energy generation and supply markets. Whilst funding opportunities are positive, there are company-scale issues that strongly influence the relative success of ventures. We have identified six key factors, transferable within the field of renewable energy and low carbon technology, that influence new business success.
Useful Links
Orion Innovations website: www.orioninnovations.co.uk
About the Author
Noel Botha is a Senior Partner at Orion Innovations. Contact him at their London office on +44 (0) 203 008 6146, or via their website.