Global Business and the Dawn of a New Energy Reality

TV Version in collaboration Global Business and the Dawn of a New Energy Reality HBR Online version EO Online version Global Business and the Dawn of a New Energy Reality was produced by Harvard Business Review Analytic Services, in association with Shell. Based on research amongst senior, global business leaders, the report explores perspectives on the global energy challenge. It asks how innovation and technology can help deliver a more secure and sustainable energy future. in collaboration in collaboration The research forms part of Energy Opportunities, a wider partnership between CNBC and Harvard Business Review, in association with Shell. This collaborative initiative aims to find solutions to the world s toughest energy challenges by working with some of the world s leading experts. Throughout 2011, Energy Opportunities will deliver a series of webinars, live brainstorms in London, Dalian and Singapore and an online discussion at www.energyopportunities.tv, with highlights airing on CNBC globally. Meet the challenge and join the brainstorm online: www.energyopportunities.tv. In Association With

A REPORT BY HARVARD BUSINESS REVIEW ANALYTIC SERVICES Global Business and the Dawn of a New Energy Reality In Association With

LETTER Shell s Perspective Gerald Schotman Chief Technology Officer and Executive Vice President Innovation, Research & Development Royal Dutch Shell The world is on the brink of a new energy era. Global energy needs are expanding rapidly. From 7 billion today, the global population is expected to rise to 9 billion by 2050. Living standards are rising fast in several economies. As a result, energy demand is likely to increase by two-thirds in the first half of this century. Renewable energy sources could grow swiftly enough to supply one-quarter of global energy needs by mid-century. That leaves fossil fuels supplying some two-thirds, with oil and gas remaining indispensable for decades. Pressure on conventional hydrocarbon resources means our industry is already moving into more challenging locations like the Arctic, and we are working with more challenging resources, such as gas containing a high degree of sulfur or very viscous oil. Meanwhile, the need for better carbon management grows ever more acute. So, the energy landscape ahead is very complex. Complexity can breed uncertainty, making it difficult for companies and society to identify how best to respond. We can be certain of one thing: there is no silver bullet. The world will need all available forms of energy fossil, nuclear, renewables over the coming decades, with natural gas playing a central role as a clean, convenient, and cost-efficient energy carrier. And solving the challenge will require action by all the players: government, energy providers, industry, and individuals in society at large. Innovative technologies and ways of working will be crucial. Shell is working across the value chain to raise the bar on what can be achieved; for example, with next generation seismic technology to find more oil and gas; enhanced oil recovery techniques to extract more from mature oil fields; and innovative Gas-to-Liquids processes, delivering products that are virtually sulfur and contaminant free. With more than $1 billion research and development spend per year, we are investing seriously in energy innovation. This includes renewable energy sources like biofuels to help create a lower-carbon future and emerging technologies such as low-temperature geothermal for residential heating. Shell is working with partners far beyond the boundaries of our industry; for example, collaborating with IT companies to handle the increasing amount of information required to deliver energy. I welcome this report because it sheds light on the complexity of the energy challenge and reinforces the importance of collaboration and open innovation for delivering practical solutions. Shell is glad to contribute to a wider understanding that will help power people s lives today and into the future. Sincerely, Gerald Schotman Chief Technology Officer and Executive Vice President, Innovation, Research & Development Royal Dutch Shell ABOUT SHELL Shell is a global group of energy and petrochemicals companies with around 93,000 employees in more than 90 countries and territories. Our innovative approach ensures we are ready to help tackle the challenges of the new energy future. For more information about how Shell is helping to meet the world s demand for energy in economically, environmentally, and socially responsible ways, visit www.shell.com. Copyright 2011 Harvard Business School Publishing. All rights reserved.

A Harvard Business 1 Business leaders are convinced that energy policy and technology must change but are still searching for innovative solutions and policy leadership. Executive Summary AS THE GLOBAL DEMAND FOR ENERGY BUILDS, existing supplies dwindle, and concerns about reducing our carbon footprint mount, business executives are increasingly focused on the urgent need for innovation and technology to solve the energy crisis. However, they believe many solutions to the challenges are outside of their control, and moves to innovate within their own organizations are still heavily constrained by market uncertainty and high ROI thresholds, according to a study of 1,748 executives by Harvard Business Services. While a majority of executives reported changing personal habits to save energy from switching lightbulbs to adapting commutes they said their organizations were less aggressive in innovating new energy solutions inside the company. Three out of ten companies said they had adapted existing products or introduced new offerings to meet the demands of consumers for energy-efficient, sustainable products. But while business leaders say their organizations can, and will, overcome some of the energy innovation challenges, they view the sprawling global economy s energy needs and the resulting demand for innovative solutions and new infrastructure as stretching far beyond their control. They look to government for leadership to support broad-scale alternative energy development and conservation. Business leaders heavily favor government incentives and funding to foster sustainable energy development. Three-quarters of organizations foresee open innovation as a catalyst for the development of technologies, products, systems, and services. The survey findings uncover a complex relationship among individuals, corporations, and energy: π π The gap between energy demand and supply concerns three-quarters of organizations. The security of national energy supplies is of major importance, with over half (54%) strongly agreeing it is an issue of global importance. π π Almost three-quarters say energy costs have become a greater concern in their personal lives, but only half say their companies consider the rising costs of energy as important. π π Energy issues drive innovation in a new range of products and services to meet the demands of energy-conscious consumers and companies. A third of organizations have remade products to be more energy efficient and plan to introduce new ones based on their energy-saving potential.

2 A Harvard Business The development and commercialization of new energy sources will take decades, so groundbreaking approaches are required now. π π Organizations expect several formidable innovation barriers to begin easing. More than one-third of organizations identify their corporate culture s resistance to fresh ideas as having been a barrier three years ago, but only 22% point to it as one over the next three years. π π Greater collaboration and open innovation are seen as valuable catalysts for progress, yet six out of ten organizations still identify competitive conflict as a hurdle. π π The majority expects government support and leadership in the drive for a more sustainable global energy resource base. π π More than half advocate that government and industry develop new infrastructures to support alternative energy sources. Relatively few expect the existing infrastructure to support solar, wind, tidal power, and other favored alternative energy sources. ππ Seven out of ten are not only concerned about home energy costs but also have made major changes in their homes and lifestyle in response. It s expected that the global energy demand will double by 2050, and executives in the survey said that groundbreaking approaches are urgently required. Based on experience with solar and wind energy, the development and commercialization of new energy sources will take decades, so action is needed now. But the survey found no major consensus among the executives around which solutions are best, how they should be delivered, or the role of business in making this happen. Instead, the leaders in the survey made clear that the government must lead in putting new policies, incentives, and infrastructure in place before real changes in energy will occur. This attitude was reflected in a recent report by the American Energy Innovation Council, a group led by industry leaders like Bill Gates and Jeff Immelt. The council said there are two reasons the government must play a key role in accelerating energy innovation: First, innovations in energy technology can generate significant, quantifiable public benefits that are not reflected in the market price of energy. These benefits include cleaner air and improved public health, enhanced national security and international diplomacy, reduced risk of dangerous climate change, and protection from energy price shocks and related economic disruptions. Second, the energy business requires investments of capital at a scale that is beyond the risk threshold of most private-sector investors. This high level of risk, when combined with existing market structures, limits the rate of energy equipment turnover. A slow turnover rate exacerbates the historic dearth of investments in new ideas, creating a vicious cycle of status quo behavior. The government must therefore act to spur investments in energy innovation and mitigate risk for large-scale energy projects.

Global Business and the Dawn of a New Energy Reality FULL REPORT A Harvard Business 3 ENERGY S INFLUENCE WITHIN CORPORATIONS has led to a keen awareness among business leaders of global supply, demand, and cost issues, along with high interest in renewable sources. Business leaders see tantalizing opportunities in innovative ideas to run more efficiently and churn new profits from more fuelefficient products and services. The continuing economic malaise in most Western countries has limited the risk tolerance of most corporate leaders, however. They view the growing gap between energy supply and demand, the security of energy sources, and development of innovative solutions and new infrastructure as challenges stretching far beyond their control. They look to government s expansive reach for leadership and support in the form of additional financial incentives. Business leaders execute within a complex global energy mix. Gone are the days when energy costs were the exclusive turf of middle managers in operations or finance. To discern future energy and market directions, today s C-level executives routinely follow global economic patterns and national policies. These executives and managers bring increasingly informed perspectives on energy supply, policy, and sustainability. Four out of ten frequently read and consume media coverage of energy topics. One-half actively involve themselves in issues, seeking out information and discussing policy. Figure 1 As a result, three-quarters of the 1,748 respondents to the Harvard Business Services survey said they are very concerned about the growing gap between energy supply and demand. The survey found a genuine connection between business leaders concerns about global energy issues and changes in their own personal energy use. But the data suggests that executives have shifted their Engaged in energy policy Figure 1 QUESTION: Please indicate which statement most closely reflects your views about energy. 26% 2% 7% 24% 41% I have little interest in reading about energy policy (Unengaged) I frequently read and listen to news reports about energy policy (Somewhat engaged) I actively seek out information about energy policy from a variety of sources (Engaged) I often discuss energy issues with friends and/or work colleagues (Actively engaged) No answer

4 A Harvard Business Attitudes toward energy issues Figure 2 QUESTION: Please indicate the extent to which you agree with each of the following statements about energy supply and demand. (All agreeing with statement.) I consider security of national energy supplies to be an issue of global importance Environmental issues in general have become increasingly important to me 54% 51% 35% 36% In my personal life, energy costs have become a greater concern 32% 41% Within my organization, energy costs have grown increasingly important 19% 36% Within my organization, compliance with energy-related regulatory issues has become increasingly important 17% 25% In my opinion, my organization is not doing enough to explore energy options 13% 24% My organization offers little follow-through in implementing more efficient energy practices Within my organization, energy costs are increasingly affecting distribution of products 12% 22% 11% 19% Strongly agree Agree Changes in personal energy use Figure 3 QUESTION: Please indicate which, if any, of the following personal actions you have taken over the past two years as a result of your concern about energy consumption. (Check all that apply.) More careful about the way I consume fuel at home 70% More likely to walk short distances rather than drive Installed energy-saving devices in my home 57% 55% Rode public transportation more frequently Purchased a more fuel-efficient car 30% 35% Installed more efficient windows in my home 21% Started cycling to work rather than driving Discarded/traded in a low-mileage vehicle Installed solar panels or wind turbines for home use Purchased a hybrid vehicle to lower the cost/impact of fossil fuel 11% 9% 6% 6%

A Harvard Business 5 personal attitudes and behaviors more than they believe their companies have. Nearly three-quarters of the respondents say energy costs have become a greater personal concern. But only 55 % say their organizations consider such costs more important. While seven out of ten describe adopting energy-saving practices at home, only 42 % say compliance with energy regulations within their organization has become more important. Figure 2 The dichotomy between their personal behaviors and corporation actions reflects a difference in the level of control. The efficiency of the car they drive, the type of thermostat and window on the wall, and how they travel to work every day are within their control, so they act on their energy cost and sustainability concerns when they can. It s not so simple in a corporate environment, though. In this tough global economy, financial survival has been the primary focus of most companies over the last few years. As they guide their corporations through uncertainty, organizational leaders balance a host of demands with protecting their income statements and balance sheets. In addition, the leaders in the survey made clear that the government must lead in putting new policies, incentives, and infrastructure in place before real changes in energy can take place. CUSTOMER- AND MARKET-DRIVEN CHANGES TO THE PRODUCT MIX Changing organizations attitudes, strategies, and products to be more responsive to concerns about energy costs and sustainability takes more time, and the collaborative approach favored by many executives means that control can be diffuse. The business case for adopting more energy-efficient operations or creating more sustainable products has been slow to develop as well. Business leaders concerns about energy costs and recognition of the opportunities are slowly rippling through decisions and policies they make, filtering into marketing shifts as organizations begin to retool their product and service lines for greater sustainability and plumper bottom lines. Indeed, customers have been the key drivers of demand for more energy-efficient products and services. When it comes to product direction, organizations view market and customer forces as equal influencers. Expect the pace to quicken: over the next three years, organizations foresee a near doubling of customerand market-driven products developed for their energy-saving potential. The manufacturing, energy, and construction sectors lead the new-product development push with the greatest enthusiasm. Asian firms are also more likely to take advantage of the new opportunity. Figure 4 It is important to note that business opportunity drives more change than does regulatory pressure to organizations energy practices. Only 19% of all organizations say regulations such as cap and trade or carbon taxes are very influential. Figure 5

6 A Harvard Business Product and service changes driven by customer energy concerns Figure 4 QUESTION: Which of the following changes has your organization made to its products or services during the past three years, and which is it likely to make in the next three years as a result of customer pressure to reduce energy use and costs or to support sustainability? New features added to existing products/services Developed new products based on their potential for energy efficiency 19% 32% 31% 32% Changes to logistics and distribution 24% 27% New distribution tactics for existing products/services 21% 26% New manufacturing processes New packaging for existing products Don t know 18% 18% 18% 18% 20% 22% Other 4% 24% Next three years Last three years Effect of regulatory pressures on energy use Figure 5 QUESTION: To what degree are regulatory pressures such as cap and trade or carbon taxes a driver of change in your organization s energy use and practices? Total sample Professional/business services Government/NFP Other Financial IT/telecoms Construction Manufacturing Energy/petro/mining/utilities 19% 24% 44% 10% 18% 64% 12% 19% 51% 15% 28% 42% 17% 22% 45% 18% 24% 43% 20% 23% 45% 22% 29% 34% 45% 24% 26% 13% 8% 18% 15% 16% 15% 12% 15% 5% Very influential (score 8 10) Somewhat influential (score 5 7) Not really influential (score 1 4) Don t know

...we re positioning ourselves to get into businesses our competitors aren t in. The only way for us to improve margins is to get into energy. A Harvard Business 7 BUSINESS CASE: THE CONSTANT DRIVER With customers and markets driving demand, the core changes to product mixes are often strategic. Executives say the initiatives they re spearheading are meaningful, extending well beyond cursory green labels that are more public relations than thoughtful strategy. The business case is always there and responds to a genuine market opportunity. An Australian-based insurer, for example, says it bypassed positioning itself as eco-friendly through a costly ad campaign and instead supports sustainable energy through a market need: underwriting insurance policies for wind farms. In the past, according to the insurer s head of strategy and operations, wind developers only options were policies designed for buildings. The cost wasn t well optimized for them, he says. It was like trying to put a square peg in a round hole. The new policies, still in development, provide more tailored coverage. Like most organizations, this insurer has also taken aim at its own operations, reducing energy use and driving down costs with changes such as videoconference systems that rein in corporate travel and installation of dedicated desktop claims systems designed to replace paper with electronic forms processing. Admittedly more energy-conscious than his employer is most days he bicycles the 16 kilometers to his Sydney office the strategy and operations leader supports the company s stance: There s got to be a business case. It has to be more than just the right thing to do. For some organizations, energy efficiency is both the right thing to do and a competitive strategy. A $415 million commercial builder refocused its contracting business five years ago on constructing renewable energy infrastructures such as biomass, solar, and biogas facilities. While waiting out the recession s after-effects, it has doubled down on its bet, installing rooftop solar panels; retrofitting corporate buildings to meet tightened water consumption standards; and training its employees in LEED (Leadership in Energy and Environmental Design), the green building certification system. Customer demand hasn t been aggressive because of the economic slowdown, says the CEO. So we re positioning ourselves to get into businesses our competitors aren t in. The only way for us to improve margins is to get into energy.

8 A Harvard Business ENERGY INNOVATIONS EVOLVE IN SUBTLE WAYS As the builder noted, embracing energy innovation as a business opportunity is risky. Indeed, corporate leaders cited a variety of challenges to introducing energy-related innovation, with several beyond the scope of their control: ππ Payback periods drag on for too long; ππ The CEO and the CFO want to avoid new costs with uncertain returns; ππ High ROI thresholds are barriers for R&D investments; ππ Government funding remains inadequate; ππ Uncertainty continues over the quality and quantity of energy available from new sources; and ππ Insufficient collaboration exists among governments, energy companies, regulators, and other stakeholders. During the next three years, most barriers will remain substantial, although several formidable obstacles are expected to recede dramatically, including one that is expressly within business leaders sphere of influence. More than one-third of organizations say that corporate culture s resistance to fresh ideas was a barrier three years ago, but only 22% point to it as one looking ahead three years a decline of about one-third. Equally impressive is the turnaround in energy providers reputations. Nearly two-thirds of organizations vouched for energy suppliers past adherence to the status quo as a hurdle to innovation. Looking ahead, that number drops to 45% a 27% improvement. Figure 6 OPEN INNOVATION IS THE LINCHPIN FOR NEW ENERGY SOLUTIONS Perceptions of shrinking barriers dovetail with organizations equally optimistic embrace of open innovation as a path to new energy solutions. Embracing external organizations consultants, suppliers, academics, small companies, select customers, and others within an industry s ecosystem is increasingly viewed as the best tactic to bring important innovations to any market. Partnerships accelerate innovation three-quarters of organizations credit such far-ranging teams as a sensible mix that will speed development of innovative energy-related technologies, products, systems, and services. Other top benefits of open innovation include an expanded talent pool to produce quicker outcomes, and improved channels for creative thinking (56%). Interestingly, support for the two benefits spikes to 71% and 65%, respectively, among those age fifty-five and older, perhaps reflecting the broader perspectives gained through experience. Figure 7 But sharing is never easy. The survey findings underscore open innovation s essential paradox: the opportunities that are its hallmarks are also its greatest challenges. Step outside your company boundaries, and a project s scope, deadlines, and control risk morphing into a group exercise. Gaining access to other companies expertise is a key benefit of open innovation. Yet six out of ten organizations identify competitive conflict as a hurdle; senior managers worry about it in even greater numbers. Strategic intellectual property asset management is an inherent competitive advantage, and more than half realize that determining who owns what is extremely difficult.

A Harvard Business 9 Main barriers to energy innovation Figure 6 QUESTIONS: What were the top three barriers to energy innovation during the past three years? What do you anticipate to be the top three barriers in the next three years? Energy providers want to maintain the status quo Prohibitively long payback periods 45% 43% 44% 62% Inadequate funding by governments 38% 38% Leadership attitudes toward avoiding new costs Uncertainty over quality and quantity of energy available from new sources 35% 35% 35% 41% Insufficient collaboration among stakeholders 34% 38% Excessively high threshold for R&D investment 31% 30% Corporate culture is resistant to new ideas 22% 36% Inadequate funding by suppliers 21% 20% Next three years Last three years Benefits of open innovation for energy development Figure 7 QUESTION: What do you see as the top benefits to open innovation of energy development? (Check all that apply.) Faster development of new technologies, products, systems, services, etc. 73% Expands the innovation talent pool to provide quicker outcomes Better way to synthesize creative thinking, whether from private, public, or non-profit sector Increases the effectiveness of R&D investments 58% 56% 53% Allows competitors to cooperate on solving industry challenges Provides the necessary approach to solve global challenges like sustainable energy 48% 47% Gives suppliers and end users a voice in product development 38%

10 A Harvard Business While more than one-third said corporate resistance to fresh ideas was a barrier three years ago, only 22% see it as a future barrier. Additional factors that confound organizations about energy-related open innovation negotiating financial arrangements, staff resistance ring familiar for any company that has undertaken the approach. The challenges of collaboration are clearly universal other Harvard Business Services studies have confirmed that defining and managing IP ownership are huge issues for open innovation initiatives. THE CHALLENGE OF SHEPHERDING INNOVATION TO THE MARKETPLACE A recent attempt at open innovation in the energy field illustrates the uncertainty that pioneers face. The CEO for the commercial construction company tells of his frustrating efforts to persuade customers to install innovative renewable-energy infrastructure created by smaller companies. We ll suggest partnering with an end-user client say, a lumber mill and tell them we ve got a technology we want to commercialize, and we ll put money into it and test it on their site, he says. But we re finding pushback among clients who don t want it tested on their site. Right now, they re gun-shy. Large companies within the energy industry face innovation challenges typical of those faced by many global corporations. A longtime industry consultant who began his career thirty years ago as a petroleum engineer observes that the oil and gas industry s sheer size complicates its efforts to innovate, even though it retains an engineering workforce drawn to challenges. The industry has historically been very innovative. It s run by engineers, and most of these guys are trying to solve problems how to drill deeper, get more oil out of the ground, or save energy at plants. Small companies have large challenges in trying to introduce energy-related innovations too. The fundamental energy framework isn t conducive to innovation, explains the managing director of asset management for a leading U.K. energy-services provider. It s dominated by big organizations that own the infrastructure. It s very hard for people with a component, for example, to enter this infrastructure. You can sell wind turbines, but ultimately they have to be sold into the grid. For small energy companies, he says, creating an impact is like trying to pour a thimble of water into the Atlantic Ocean. INFRASTRUCTURE IS A GAME CHANGER To business leaders, new energy sources demand new infrastructure. Organizations have strong and strikingly unexpected views about the energy sources they favor, the global regions they perceive to be most innovative in developing alternative energies, and who should take the lead in energy distribution. And they say it is all out of their control.

Top countries for energy innovation Figure 8 QUESTION: Which countries do you consider the most innovative in terms of promoting energy innovation? A Harvard Business 11 37% 33% 17% 16% 13% 11% 10% 10% 9% 9% Germany United States China Denmark Sweden Netherlands Brazil 6% 6% 5% 3% France Norway United Kingdom Canada Finland Australia India 2% Israel Respondents support for alternative energy sources extends far beyond the conservative stance expected of business leaders. Solar energy tops the list, with nearly two-thirds foreseeing it as a major R&D initiative over the next five years. Wind energy follows closely, with more than half identifying it as a focus. Support for advanced biofuels is evidenced by 41% expecting future R&D focus on waste-to-energy and more than one-third (37%) expecting development of fuel cells as an alternative source. The regional sources of energy innovation are also surprising. Although China leads in solar and wind energy development in terms of market share, survey respondents cite Germany as the top energy innovator, with the United States second and China third. Figure 8 Germany s strongest innovation endorsement comes from the most knowledgeable individuals: those in the energy industry are even more emphatic in their rating of the country s innovation. Their support stems from the German government s support of alternative energy development through R&D funding and tax incentives and its results wind, biomass, solar, and other renewable sources supply approximately 20% of the nation s electricity. Given some business leaders emphasis on emerging sustainable technologies, it s natural that they consider revamping the power generation and transmission infrastructure a priority. Organizations may be investing modestly in their own energy-related product development, but they think big when it comes to delivery of emerging energy sources. More than half support development of a new energy distribution infrastructure over the next decade. In fact, nearly two-thirds (61%) of those who say they are actively engaged in energy policy favor a new infrastructure.

12 A Harvard Business Because the placement of new infrastructure frequently triggers controversy no one wants a new windmill farm in their backyard one-third of organizations advocate the more pragmatic approach of adapting the existing infrastructure to accommodate new energy sources. This approach has more support among those in the know: organizations in the construction and energy industries. Figure 9 LOOKING TO GOVERNMENT FOR LEADERSHIP The political challenges involved in energy infrastructure are part of respondents broader view that government needs to play the leading role in energy innovation. Yet so far, they re expressly unhappy with the results. They give mediocre marks to energy companies, trade associations, and other entities for their alternative energy development, but they reserve their loudest complaints for national governments almost six out of ten express low satisfaction with governmental efforts. Figure 10 They don t want government to control energy resources or distribution. However, there is demand for financial incentives to offset the business case risks. Two-thirds favor investment vehicles and tax breaks to foster sustainable energy development. Figure 11 Amid the broad strokes are details that speak to the geopolitical landscape and corporate bottom lines. Demand for government incentives reaches far higher in the developing world, notching extensive support among organizations in the Middle East and Africa, Asia, and South/Central America. North American and European organizations weigh in at a more moderate level. The same pattern applies to encouraging alternative energy by pairing tax incentives with increased regulation on traditional energy sources: two-thirds of organizations in developing nations favor the combination, while just half of those in the more affluent Western world agree. Infrastructure adaptation views Figure 9 QUESTION: To what degree, if any, do you think your country should adapt its existing infrastructure to deliver energy from alternative sources? 3% 3% 2% 36% 56% I believe a new energy distribution infrastructure needs to be developed over the next decade The existing energy distribution infrastructure should be adapted to incorporate alternative energy sources I do not think the energy distribution infrastructure needs to be modified to support alternative energy sources Don t know No answer

A Harvard Business 13 Satisfaction with alternative energy developments Figure 10 QUESTION: Please describe your satisfaction with the current level of effort toward alternative energy development by the following stakeholders. National government Local government 57% 34% 6% 3 56% 32% 6% 4 Energy industry 50% 36% 9% 3 All other manufacturing and services companies NGOs (e.g. foundations and industry associations) Charitable organizations 46% 41% 5% 5% 31% 47% 10% 9% 26% 39% 12% 20% Low Medium High Don t know Refused Support for government role in innovation Figure 11 QUESTION: What is your view of the role of government in energy innovation and development? My government should provide tax incentives and research funding to encourage innovation of sustainable energy. 69% My government should provide additional tax incentives and increase regulation of traditional, non-sustainable energy use to encourage alternative energy innovation. Intellectual property derived from publicly funded energy innovation should be available to all on a licensing basis. 51% 54% My government should take control of key energy production and distribution. Government should not be involved in energy development and innovation. 10% 13%

14 A Harvard Business Context is everything. Organizations in energy-dependent industries such as construction and manufacturing are buoyed by the prospect of tax incentives and grants for sustainable energy innovation, with three-quarters favoring them. In the energy industry, two-thirds of respondents support such incentives. Figure 12 NATIONAL ENERGY POLICIES TO GUIDE INVESTMENT The CEO of an Arizona energy-research company offers a broader perspective, including stronger support for energy-related regulation than you would expect. During a stint as chairman of a Department of Commerce industry council, he listened to the energy-related woes of executives in traditional industries like textiles, automotive, and plastics. Like other executives we interviewed, he believes that the focus on regulations distracts from the real problem. No single regulation or combination of them is to blame, he says. The real problem for the United States is the lack of a national energy policy. What s missing is a comprehensive, integrated policy related to manufacturing and energy, says the CEO, a 30-year veteran of high technology and renewable-energy industries. If you put a price on carbon, it would self-heal all those things. Without a price, you have to fight each battle independently. It s hugely frustrating for anyone in business. Japan, Germany, France, and Saudi Arabia have articulated national policies, some more long term and visionary than others. China, already an active investor in wind-turbine production and solar photovoltaic manufacturing, has pledged to spend $17 billion by 2020 on electric vehicle infrastructure. Views on government incentives and regulations Figure 12 QUESTION: What is your view of the role of government in energy innovation and development? My government should provide tax incentives and research funding to encourage innovation of sustainable energy. My government should provide additional tax incentives and increase regulation of traditional, non-sustainable energy use to encourage alternative energy innovation. 41% 71% 74% 64% 57% 60% Intellectual property derived from publicly funded energy innovation should be available to all on a licensing basis. 45% 43% 53% My government should take control of key energy production and distribution. Government should not be involved in energy development and innovation. 12% 10% 8% 9% 11% 11% Other sectors Energy dependent Energy industry

We re purely about price even for the energy, the future focuses on the bottom line. A Harvard Business 15 China has a long way to go but at least they have a policy, says the executive. It may not be the smoothest operation, but it ll happen. It has a policy for the environment and for manufacturing two things the United States is lacking. CONCLUSION Business leaders are convinced that energy policy, supply, and demand are on the cusp of great changes, yet the new directions are still undecided. As they continue to face down the grimmest world economy in years, they look to government for leadership in energy policy and express low satisfaction with efforts so far. Business leaders heavily favor government incentives and funding to foster sustainable energy development. Three-quarters of organizations foresee open innovation s advantages speeding the development of technologies, products, systems, and services. As they guide their corporations through uncertainty, leaders of organizations want to balance doing the right thing with protecting their income statements and balance sheets. Innovative approaches to build new, low-carbon business models remain cautious and often slow. A multisite entertainment corporation started in ways that seem small but pay off big, like turning out the lights. When its outdoor facilities close at the end of the day, the company now forgoes the all-night illumination that it once considered a promotional cost, a sort of nighttime advertisement. It contracts with a third party to source its electricity at a better price, and it is launching a solar partnership. In addition, it sells its drums of used cooking oil for conversion into biodiesel fuel, even investing $60,000 in equipment that purifies the oil, thus allowing the company to command a higher price for it. If that sounds like a persuasive argument that the company has gone green, it s not, says an executive with the billion-dollar company, We re purely about price. Whatever is the cheaper energy source is the one we go after. Even for energy, the future as global and undecided as it is focuses on the bottom line.

16 A Harvard Business METHODOLOGY AND PARTICIPANT PROFILE Harvard Business Services completed research with 1,748 individuals who were drawn primarily from the list of Harvard Business Review magazine and email newsletter subscribers and through social media channels. In addition, in-depth interviews were conducted by telephone with a cross-section of executives in large and medium-sized companies. This research was conducted in May and June 2011. Participant Profile Seniority Forty-two percent of respondents were business leaders in senior management positions, including 28% who were in executive management. An additional 48% were in management positions. Gender and age Over three-quarters of respondents were male (80%). Twenty-nine percent were under 35 years old and over half (54%) were 35 54. Key industry sectors More than one-quarter of participants came from professional and business services (14%) and manufacturing (12%). Eleven percent were from the IT/telecoms sector, with government/ NFP and energy/petro/mining/utilities sectors contributing 10% each. Region Just under half of responding organizations were based in North America (46%), with a quarter in Europe (25%) and just under a fifth (18%) in Asia/Pacific. Involvement in energy Thirty-eight percent of respondents businesses had some involvement in the Energy sector; more than half (55%) had no involvement. [Seven percent did not define their involvement.] Energy decision making Sixty-two percent of respondents were involved in decisions regarding energy use at their organization, either as decision makers (35%) or influencers (27%). Thirty-eight percent were not involved in energy decisions. Size of organization Responding organizations had an average number of employees of 4,168. Sixty-five percent were in medium-to-large-sized organizations of 100+ employees, including 46% who were in large enterprises of 1,000+ employees. Average annual sales were $1.7 billion. hbr.org

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