Business Management Blog

We all know the main contributors to carbon dioxide emissions: Europe, the United States, China, India, and Russia. The sheer size of these economies — and the expected growth rates in the developing ones — makes avoiding an increase in global CO2 emissions unlikely in the short term. That’s why we need to manage that increase carefully.

Those of us in the energy industry can do a lot about it, and we’re already making progress. E.ON is working on a design for a gas-fi red power station that will convert 60% of the gas consumed into energy. A couple of coal projects hope to reach effi ciency rates of 46%, and other projects that aim for efficiency rates approaching 50% are already under way.

By achieving those kinds of numbers in countries like Russia or China, where power stations have efficiency rates of 35% or less, we could reduce CO2 growth rates significantly and immediately. E.ON is also investing €8 billion in sustainable and new energy technology between now and 2012.

We’re researching and developing clean coal technology that could create a new generation of power stations worldwide. And we’re planning to build more large-scale offshore wind farms in the UK and Germany.

As for consumption, we have to start educating people that energy is a scarce resource to be used as effi ciently as possible. When I walk into a hotel room in the United States, for example, I always fi nd all the lights switched on. Worse, there’s no main switch, requiring you to turn off each light individually when you leave.

As an energy provider, we have to be at the forefront of that education. E.ON has already invested a great deal of time showing our customers — individual home owners and large corporations alike — how to cut down on unnecessary energy consumption. We also teach communities and school children about responsible energy use and conservation.

We must be realistic, though, about how much businesses can do. There is plenty of talk in the press about switching to a renewable and clean energy source like wind or solar or geothermal power. But it will take a long time and many billions of euros before such alternatives can serve as the mainstay of a power grid. With coal, you can rely on your power stations at all times, and you can switch gas on and off to manage fluctuations in demand.

But due to the poor design and planning regime for energy in general, currently Germany must run power stations in parallel with wind farms to make up for sudden changes in our generation of wind power. There’s nuclear energy, of course, which is emission free and reliable. But nuclear is not a total solution because not all countries that are capable of managing a nuclear program, including Germany, want to invest in it.

The truth is, if the German people don’t start switching off lights and living in an environmentally responsible way, we will be forced to use such sources. What is clear is that a diverse and reliable mix of energy generation — from solar power to nuclear power — is the only way to ensure a secure supply while protecting our environment.

That said, finding a long-term solution is also a political challenge, not only a business one, and the developed world has to take the lead. Countries like China, India, and Russia argue that their per capita emission levels are much lower than Europe’s or the United States’.

They are also already doing a lot — for example, China sets higher standards for car emissions than the United States does. What’s more, such countries believe that they are entitled to achieve the same level of prosperity that the United States and Europe have achieved.

When it comes to reducing emissions, the United States can afford the most and does the least. In the short term, Americans must think seriously about their state-based infrastructure and regulatory framework, which breed inefficiencies. Considering that California’s consumer-led price regulation forced utilities to skimp on investing in new plants and infrastructure, however, I’m not optimistic about the country’s ability to assure a reliable energy supply, let alone an environmentally friendly one.

Europe isn’t doing much better. It seems to me that, realistically, only five or six of the 27 EU members even take the issue seriously — and those five or six don’t seem all that committed. Moreover, the German government, which provides about €400 million for the development of renewable energy technology, should ask whether that is really enough for such a rich country.

One of Europe’s greatest problems is the lack of consensus about what kind of energy industry we want and how to achieve it while balancing Europewide and country-specific climate change targets. For example, for about 20 years now, governments have tried to break up the big utilities to bring about price reductions through competition.

Then when Russia turned off the gas pipeline to Ukraine in 2006 for a couple of days, security of supply topped the political bill. People started worrying about dependence on Russia for supplies.

All of a sudden, encouraging the development of large energy suppliers like E.ON, which can negotiate on more equal terms with the likes of Gazprom, Russia’s giant gas supplier, seemed sensible. And all the talk about climate change militates against fragmentation as well: How can small suppliers mobilize the large-scale investments needed to deal with climate change?

The 2005 creation of the Emissions Trading System is Europe’s greatest achievement in this area. Granted, ETS got off to a rocky start because trading liquidity has been slow to build. But if the U.S. experiment with sulfur dioxide emissions trading is any indication, the market will pick up as financial institutions assume a larger role.

The real benefit of this market is that it puts a price on carbon emissions. By tightening the link between environmental concern and business performance, the market will make it easier for companies like E.ON to borrow against future savings in carbon emissions to finance current investments in less carbon-intensive power stations.

More fundamentally, putting a price on carbon will give managers dollar or euro numbers for their environmental objectives that are as solid as any of the other variables to which they manage.

Above all, we need a stable, long-term regulatory framework (and targets) to allow companies like E.ON to invest in technology and infrastructure that will help protect our environment and ensure a reliable energy supply today and tomorrow.

Source: Harvard Business Review, Jul-Aug 2007

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