Understanding the Value of Business Models For Renewable Energy: Empirical Evidence from Choice Experiments with Investors University of St. Gallen Moritz Loock, Prof. Dr. Rolf Wüstenhagen
In What Business Models do Top Investment Managers for Renewable Energy Prefer to Invest? University of St. Gallen Moritz Loock, Prof. Dr. Rolf Wüstenhagen
Problem Strong need for capital but, how to evaluate renewable energy investments? renewable energy sector is an entrepreneurial industry (coined by technological, political and market uncertainty) -> traditional evaluation of investment choices is difficult to apply. From preliminary research we assume business models to be suitable to evaluate investment decisions. Business models provide a robust qualitative framework. But there is currently no research on that. New Energy Finance, Global Future 2009 Page 3
Theory: What is a business model? A business model describes how to make money out of a technology (or an idea) is a mediator between a technology and economic value creation Business model literature e.g. Chesbrough & Rosenbloom, 2002; Magretta, 2002; Morris et al., 2005; Zott & Amit, 2007, 2008 etc. Page 4
Theory: What is a business model? A business model covers three aspects (that have to fit to each other): generic value propositions are Best Technology, Lowest Price, Best Service e.g. system sales, leasing e.g. certain resources or capabilities needed to fulfil the value proposition can be overall classified according to two gestalt-themes: innovation and efficiency Business model literature e.g. Chesbrough & Rosenbloom, 2002; Magretta, 2002; Morris et al., 2005; Zott & Amit, 2007, 2008 etc. Page 5
Theory: 2 Business Model Gestalt-themes Innovation >> Creating value through new products and services Efficiency >> Creating Value through Lowering costs Examples for innovativeness: high investments in R&D, property of patents and/or copyrights a) general cost reduction capabilities - economies of scale, improvement of processes, constantly seeking to reduce cost b) lowering transaction costs, improving marketing and sales capabilities: direct access to customers, transparent information and transactions for and with customers Business model literature e.g. Zott & Amit, 2007, 2008 etc. Page 6
Business Models: Attributes and Levels Business Model Attribut Level Value Proposition Value Proposition Best Technology, Best Services, Lowest Prices, unclear Delivery Config. [Innovation] Delivery Config. [Efficiency] Delivery Config. [Efficiency] Innovativeness Marketing & Sales Capabilities Cost reduction Capabilities Price tag P/E ratio <10, 10-20, >20 1) 1) 1) 1) ***** = industry leader, *** = industry standard, * = industry laggard Page 7
In what business models do top renewable energy investment managers prefer to invest? Page 8
Sample Top investment managers Sample creation: Thomson One Banker 280 investment managers which invested in at least two public listed renewable energy firms + NREL renewable energy investors list = unique database of 280 high profile renewable energy investment managers. Sending out invitation for online survey: www.business-models-for-renewable-energy.com 13% return -> 37 high profile renewable energy investment managers participated Page 9
Sample Description Top investment managers Type of company Equity Assets under management in % Company headquarters: Europe (75,9 %), US (17,2 %), Asia (3,4 %), ROW (3,4 %) Years active investing in renewables: less than 2 years (20,7 %), 2-4 years (44,8 %), 5-10 years (24,1 %), more than 10 years (10,3 %) Survey participants job: Chief Investment Officer (17,2 %), Director of Research (3,4 %), Portfolio Manager (37,9 %), Analyst (27,6 %), Other (13,8 %) Page 10
Sample Top renewable energy investment managers investment style Scale for different market-capitalization (company size): small-cap: less than US$1 billion; mid-cap: US$1 billion to US$5 billion; large-cap: more than US$5 billion. Scale for different valuation: Value stocks: P/E ratio of <10 %; Blend stocks: P/E ratio of 10-20 %; Growth stocks: P/E ratio of >20 %. Page 11
Sample Top investment managers renewable energy technology preference % of respondents that would invest in that item Page 12
Sample Top investment managers renewable energy value chain preference % of respondents that would invest in that item Page 13
Method: Choice Based Conjoint (CBC) In what business models do top renewable energy investment managers prefer to invest? State-of-the-art approach for measuring choice preferences: conjoint analysis High sample scope leads to an assumingly small sample thus explorative research which aims to derive propositions Scholars suggest for developing propositions a sample between thirty and sixty respondents (Orme, 2006) For choice experiments different methods are available (ACA, CBC, ACBC). Although some scholars recommend ACA for smaller samples we apply CBC as we think it is most convenient for respondents. Orme (2006): Sample Size Issues for Conjoint Analysis - available at www.sawtooth.com Page 14
Method: Choice Based Conjoint (CBC) Basic concept for choices: Utility maximization Alternatives (e.g. business model characteristics) are described by attributes with different levels Attributes = sources of utility Utility of alternative i: Ui = Vi + εi Vi = systematic utility expressed as a function of observable variables εi = Random utility component = unobserved influences Part worth = contribution of a specific attribute to the overall utility of an alternative Page 15
Survey: Choice Experiment Screenshot Page 16
Results: HB Estimation N=370 choices Mean Part Worth Std. dev. t-value lowest prices 0,1324 1,6967 0,078 best technology 0,3291 1,6205 0,203 best services 1,1385 0,9790 1,163 unclear -1,6000 1,9856-0,806 Innovation (leader) 2,1882 1,4183 1,543 Innovation (average) 0,0114 1,0081 0,011 Innovation (laggard) -2,1997 1,1478-1,916 Marketing & Sales (leader) 1,7478 0,8758 1,996 Marketing & Sales (average) 0,2110 0,6788 0,311 Marketing & Sales (laggard) -1,9588 0,9883-1,982 Cost Reduction Capabilities (leader) 3,6550 2,3456 1,558 Cost Reduction Capabilities (average) 0,4323 1,4072 0,307 Cost Reduction Capabilities (laggard) -4,0874 2,1152-1,932 PE < 10 0,9143 1,6479 0,555 PE 10-20 1,0033 0,8479 1,183 PE > 20-1,9176 1,5324-1,251 Page 17
Results: In what business models do top renewable energy investment managers prefer to invest? HB zero-centered diffs Attribute-Levels Page 18
Results: In what business models do top renewable energy investment managers prefer to invest? HB zero-centered diffs Attributes only Page 19
Results: Proposition 1 a) Renewable energy investment managers prefer to invest in business models with high cost reduction capabilities b) Business Models with low cost reduction capabilities shoo away investors Page 20
Results: Proposition 2 a) Besides cost reduction capabilities, renewable energy investment managers prefer to invest in business models that enable innovation b) Innovation capabilities are more important for investors than marketing and sales capabilities Page 21
Results: Proposition 3 a) Renewable energy investment managers prefer to invest in business models that propose best services to their customers b) An unclear value proposition shoos away investors Page 22
Results: Proposition 4 Certain business model characteristics (e.g. value proposition and delivery configuration) are more important for investment managers than current financial figures (e.g. P/E ratio) Page 23
Implications for Renewable Energy Managers To improve financial relations and fundraising success, managers should reduce costs but still keep innovativeness up develop business models with a best service proposition avoid unclear value propositions to customers clearly communicate business model characteristics instead of (respectively in addition to) financial figures Page 24
Implications for Renewable Energy Research There is urgent need for following research Benchmarking studies on business models with high cost reduction capabilities and high innovativeness (Who is the cost-efficiency innovation leader?) How to develop service driven business models for renewable energy? How to further develop business model analysis as a performance predictor to back-up investment decisions? -> business model based investment heuristics How do renewable energy investment preferences differ among different investor types? Page 25
Limitations Small sample -> explorative research mainly no evidence on how preferences differ between different investors (large cap vs. small cap, short-term vs. long-term etc.) simplified (one-fit-all) level but investment decision may differ from case to case -> not all influencing variables could be covered geographical distribution bias (investment managers mainly from Europe) However, this research is a first step into a better understanding of investment decisions in renewable energy Page 26
Summary: Main Findings Business Models with high cost reduction capabilities attract investors But cost reduction should still enable innovativeness Proposing best technology alone is not good enough for investors: Investors regard best services to be the best value proposition overall An unclear value proposition shoos away investors Business model characteristics are more important for investment managers than current financial figures (e.g. P/E ratio) Page 27
Thanks! Page 28