Strategic g Choices in Energy gy Investment: What can we learn from a behavioral economics perspective? Prof. Dr. Rolf Wüstenhagen

RoCC Management Insight Series No.6 Publisher: Profile Unit Responsible Corporate Competitiveness University of St. Gallen (HSG) March 2011

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Summary Managerial Challenge Central Insight Application & Scope Research Basis

Summary: Visual Collaboration

What is the managerial challenge?

What is the central insight?

• There is a fundamental change in global energy supply, we are on the road from 20:80 to 80:20. This leads to significant g investment opportunities in renewable energy. • How can firms make sure their strategic energy investment choices are in line with the new opportunities? And how can key insights from behavioral economics help to understand the challenges?

• Strategic energy investment choices are made under conditions of bounded rationality, leading to status quo bias and path dependence. • Overcoming path dependence is a key challenge for managers to succeed in the new energy market.

How and where can it be applied?

What research have you conducted?

Previous Work & Source of Authority

• • • •

Corporate investment in energy infrastructure Venture capital investment in cleantech Public investment in research and development Consumer decisions to adopt new energy technologies

• More than eight years of research with venture capitalists and other energy investors • Extensive marketing research to understand consumer decision making in the energy market

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Summary

Managerial Challenge Central Insight

The Challenge: Energy markets on the road from 20:80 to 80:20, 80:20 but investment slow to catch up • There is a fundamental change in global energy supply. While currently less than 20 % of global energy supply comes from renewable sources like hydro hydro, wind, solar, biomass and geothermal energy, and 80 % is based on nonrenewable fuels like oil, coal, gas and nuclear, this is anticipated to change by 2050, leading to significant investment opportunities in renewable energy. • However, firms and other investors have been surprisingly slow to adapt to the new opportunities.

Application & Scope Research Basis Previous Work & Source of Authority

100% 80% 60%

Non-Renewable Energies

40%

Renewable Energies

20% 0% 2010

2020

2030

2040

2050

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Summary Managerial Challenge

Central Insight Application & Scope

Insight: Status Quo Bias and Path Dependence in Strategic Energy Investment • Energy investors, as other human beings, are acting under what Herman Simon (1957) called bounded rationality rationality. • One of the effects well-documented by behavioral economists is status quo bias. Under conditions of uncertainty, economic actors are likely to favor the status quo over innovative new approaches approaches. • On a collective level, this leads to path dependence. • Overcoming path dependence is a key challenge for managers to succeed in th new energy market. the k t

Research Basis Previous Work & Source of Authority

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Summary Managerial Challenge Central Insight

Application & Scope Research Basis

Application and Scope Status Quo Bias and Path Dependence have significant explanatory power in the context of energy investment decisions: • Public R&D spending is slow to shift from conventional to new energy sources • Technology for Net-Positive-Energy Houses is available, and yet people continue ti to t buy b oilil h heating ti • Venture Capital: low percentage in clean energy • Corporate investment in renewable energy vs. oil • Green Electricity: gap between attitudes and behaviour

Previous Work & Source of Authority

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Summary Managerial Challenge Central Insight Application pp & Scope p

Research Basis Previous Work & Source of Authority

Our Evidence: Experiments, Surveys, Case Studies Wüstenhagen and Teppo (2006): • Why are two thirds of all venture capital investment going into biotech, IT and telecom, while energy and environmental technologies accounted for less than 5 % (and have only recently increased above 10 %)? • Rational risk-return paradigm could only partially explain the phenomenon. • Evidence for path dependence: • Investors continue to invest in areas that they are familiar with. • “It It takes $10m to educate a venture capitalist capitalist.” • Those who overcome path dependence early on can gain significant firstmover advantages in the growing renewable energy market.

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Relevant Publications • •

• Summary Managerial Challenge

•

Central Insight A li ti & S Application Scope Research Basis

Previous Work &

•

Wüstenhagen, R., Wuebker, R. (eds., 2011): Handbook of Research on Energy Entrepreneurship. Edward Elgar Publishing, Cheltenham UK and Lyme US. Litvine, D. and Wüstenhagen, R. (2011): Helping “light light green green” consumers walk the talk: Results of a behavioural intervention survey in the Swiss electricity market. Ecological Economics, 70 (3), 462474. Hockerts, K. and Wüstenhagen, R. (2010): Greening Goliaths versus Emerging Davids – Theorizing about the Role of Incumbents and New Entrants in Sustainable Entrepreneurship Entrepreneurship. Journal of Business Venturing, 25 (5), 481-492. Wüstenhagen, R. and Teppo, T. (2006): Do venture capitalists really invest in good industries? Riskreturn perceptions and path dependence in the emerging European energy VC market. Int. J. T h l Technology M Management, t 34 (1/2) (1/2), 63 63-87. 87 Moore, B. and Wüstenhagen, R. (2004): Innovative and Sustainable Energy Technologies: The Role of Venture Capital, Business Strategy and the Environment, 13, 235-245.

Source of Authority

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Contact • The author will gladly respond to any inquiries: − Prof. o Rolf o Wüstenhagen, üs e age , Good Energies e g es C Chair a for o Management a age e o of Renewable e e ab e Energies, e g es, Director of the Institute for Economy and the Environment: [email protected]

• Further p publications: − Wüstenhagen, R., Wuebker, R. (eds., 2011): Handbook of Research on Energy Entrepreneurship. Edward Elgar Publishing, Cheltenham UK and Lyme US.

• Further training programs: − Executive Education Programme (DAS) in Renewable Energy Management (REM-HSG), http://www.iwoe.unisg.ch/LehrstuhlManagementEE/Weiterbildung.aspx p g g g p Profile Unit Responsible Corporate Competitiveness University of St. Gallen Dufourstrasse 40a CH-9000 St. Gallen Tel. +41 71 224 39 04 Fax +41 71 243 23 55 www rocc unisg ch www.rocc.unisg.ch

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