RCEM: Views on Energy News

A new era and an uncertain future

Few would go against the view that energy companies and policy makers are facing significant challenges as we enter a new era. The issues to be addressed are many: can we count on technological breakthroughs to cope with surging energy demand and at the same time handle the long term environmental constraints? What type of regulatory framework is most likely to provide the incentives for the necessary changes to take place? To what extent are nations ready to cooperate in addressing global energy challenges? Can we be assured that capital markets will provide the tremendous funds needed to develop energy infrastructures and improve energy efficiency?

Many players with antagonism

Understanding the energy industry has also become extremely complex: who are the players? What are the linkages and what is the balance of power? Its scope used to be rather well delimited; this is no longer the case.

The sector has long been segmented into oil and gas versus utilities, resulting in a high degree of specialisation, but this distinction no longer holds with most companies diversifying their activity. Oil-rich countries have also established their own national oil companies to put their hand on reserves, forcing large international oil companies to give up their power and eventually to take high risks in non conventional oil and gas projects. Outsourcing is now a systematic operating mode, giving high-tech service companies a dominant position along the value chain. In the electricity sector, as a consequence of 'unbundling' imposed by regulators and other measures aiming at more competition, the dominance of historical national champions is challenged by new entrants.

At the same time, technology providers are expected to play a key role, given that new technologies will inevitably affect the whole system. For instance, the development of 'smart' technologies for a new grid and demand responsiveness may dramatically affect the electricity market; it is indeed a prime opportunity for newcomers such as IT and communication firms to enter the industry.

Providers of cheap efficient solar panels will also play a key role, what with technological breakthrough allowing the long distance transport of electricity also affecting the organisation of the electricity market on a grand scale. It is a threat for incumbents, but this also provides opportunities for newcomers keen to bring change to their profit margins.

Technological and innovation capabilities are key...

In this dynamic and uncertain environment, energy companies are undoubtedly facing a technological challenge first and foremost: they need to build a cutting edge technological capability to be prepared to transform and expand their activity through innovation. For that reason they are deeply concerned by the shortage of technical and engineering skills observed in many countries, and it is the justification for the various types of cooperation initiated with universities and engineering schools in order to fight scarcity of highly needed human resources. However, the natural supremacy of an "engineering culture" within energy companies may also be a source of inefficiency; the propensity to rely on numbers fitting in models describing the state of the world may not fit so well when ambiguity dominates and when the future is, for the most part, unpredictable.

...but management skills also count!

High cost overruns and delays in project implementation; the increase in the frequency of accidents; inefficient post-merger management; and the spectacular failure of hazardous ventures are common in the energy industry, and all signs of weaknesses in the management system. The pre-eminence of technological issues should not put out of sight the managerial challenges in a capital intensive industry where long term complex and risky projects are the norm. Ignoring this truth may prove very costly.

Three main managerial challenges should be considered:

  • The need to shape the organisation to cope with a high level of uncertainty and change. Adopting a comprehensive view of the activity, avoiding silos, and enhancing internal communication and cooperation are key.
  • The need to develop an efficient risk management system, not just to comply with HSE regulations but rather with the ambition to enhance risk awareness and assure that behaviours are responsible and in line with the policy.
  • The need to reflect on outsourcing strategies and improve supply chain management

As a leading European business school, ESCP Europe ought to be involved in shaping the future of the energy industry. With this in mind, we have pioneered both an executive and postgraduate Master in Energy Management, and launched the Research Centre for Energy Management (RCEM) at the London campus.

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