Transition to Renewable Energy through Social ...

12th International Conference on Enterprise Systems, Accounting and Logistics (12th ICESAL 2015) June 29-30, 2015, Skiathos Island, Greece

Transition to Renewable Energy through Social Enterprises

Ove Oklevik1, Jon G. Nesse2, and Johannes Idsoe3. 1,2,3,

Department of Economics and Business Administration, Sogn og Fjordane University College, Box 133, N-6851 Sogndal, Norway

[email protected], [email protected], [email protected]

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Abstract This paper aims to describe how four cases of social enterprises might function as drivers in the transition from the use of fossil fuels, such as coal, petroleum, and natural gas, to renewable energy technologies (RETs). According to literature on entrepreneurship theory, the drivers of RET can be divided into three different categories: environmental concerns, social impact, and secure supply of energy. Prior research also suggests that the barriers to RET can be divided into three main categories: energy prize, intermittent supply of energy, and embedded incumbent technology. In this study, we explore four cases of RET to identify why the projects emerged and what obstacles and barriers the projects faced during the project period. Although several differences emerge, one driver that stands out as the single most important is social impact. The social profile of all four companies studied resulted in the realization of the RET projects, though one project was put on hold because of a lack of funding. The other three remain in operation. Keywords: Social Enterprises, Renewable Energy, Entrepreneurial Theory.

1. Introduction The transition from the use of fossil fuels, such as coal, petroleum, and natural gas, to renewable energy technologies (RETs) has received increasing attention in recent years. There is growing recognition that a fundamental transition to renewables is required both to reduce the detrimental environmental and societal impact of business activities (Hall, Daneke, and Lenox, 2010) and to secure the future supply of energy (Asif and Muneer, 2007). A main challenge for establishing new renewable energy production in Norway has been the lack of “drivers” for this type of production on the national level (Buen, 2006). In most countries, energy securities, employment, industrialization, regional development, and so on, are important factors behind the transition to renewable energy production. The development of renewable energy production provides insight into the role of local factors as both barriers to and drivers of innovation processes. It is particularly important to understand these barriers and opportunities to develop strategies to spur successful innovation 108


(Painuly and Fenhann, 2002). This paper contributes to the research area by describing four cases of how social enterprises might be a driver of the transition to renewable energy. We adapt a descriptive approach to present four RET cases in Sogn og Fjordane county in Norway, to identify possible drivers and barriers of RET for the enterprises involved.

2. Theory Transitions to renewable energy evolve both in existing organizations and through start-ups of new ventures. According to institutional theory (Scott, 2001; Thornton and Ocasio, 2008), there are three main reasons that companies increase their activities in renewable energy: legal, normative, and cognitive considerations. New laws might force companies to use more renewable energy. Such a forced transition is necessary but not enough because it might encourage defensive RET strategies. Any company that abides by the laws could claim to be a front-runner in sustainability. However, in some cases companies use more proactive RET strategies (Schaltegger, Lüdeke-Freund, and Hansen, 2012), described as normative and cognitive considerations. Normative issues are something companies take into consideration to determine which choices will pay off better than others in the eyes of important stakeholders. For example, if customers and investors want more RET, the companies must respond in some way. If the company policy is to use RETs, decision makers will likely always look toward RET solutions first. In this case, it becomes a cognitive or cultural conviction that RETs are a natural choice. Although drivers of RET can be divided into legal, normative, and cognitive considerations in institutional theory, alternative explanations or drivers are available in entrepreneurial literature (Hall et al., 2010). The first driver or motivation for start-up ventures is environmental concerns (Hall et al., 2010). For example, a company might be established to improve protection of the environment by replacing fossil-based fuel with renewables. The second driver is social impact (Nicholls, 2004). Companies can be started to establish more workplaces or with the goal of a social distribution of income. Alternatively, the company can be run with a zero-profit goal. The last driver is to secure supplies of energy. For many countries, transition to renewable energy might be a measure to reduce the dependence on the import of fossil fuels. According to Smith (2012), there are three main obstacles to the application and use of RETs: pricing, the intermittent supply problem in the renewable energy system, and the advantages of the embedded incumbent technology. The production and distribution costs per kilowatt hour of electricity are basic issues in economics of energy. Thus, determining the cost structure in different renewable technologies is important to understand the obstacles for the diffusion of renewables. In addition, Norway has high levels of costs in general, which might further complicate the diffusion process. That is, in Norway the main renewable technologies incur significant higher costs than the production of hydropower. Thus, the higher costs of renewables versus hydropower are barriers to investments in alternative renewables to hydropower in Norway. However, the main potential of hydropower developments in Norway has already been explored, and further development is difficult. The intermittent character of renewables means that they require backup systems when natural conditions make this necessary. This characteristic implies that load factors for renewable technologies are below 30% (Smith, 2012). The main problem is that 109


any backup technology has a lower load factor than it would have with continuous use, leading to major problems in efficiency. Two types of backup technologies exist. The first is storage facilities for potential energy, such as the storage of water for later hydroelectric production. The second is chemical storage, such as batteries. Alternatively, facilities such as gas-fired power stations can be kept in reserve. The use of backup technologies means that costs rise. The embedded incumbent technology based on hydrocarbons is a major obstacle for renewables (Smith, 2012). When innovations of renewable energy emerge, incumbent technologies have advantages because of fixed and variable costs in production. For a new technology to diffuse, the total variable and fixed costs must be less than the variable costs of the incumbent technology. This condition is not easily met, because innovations often require substantial post-introduction improvements. Even if the sum of variable and fixed costs of introducing renewables is below the fixed costs of the existing technology, the existing technology still has advantages. Technologies do not exist as single factors but as part of more complex technological systems. This reduces the diffusion of renewables because replacement investments must fit into the existing systems of production, distribution, and use.

3. Methodology This study employs a case persuasive study approach (Siggelkow, 2007) to examine both investment decision processes and challenges of investing in renewable energy. While a persuasive case study cannot be used to prove a theory, it can prove useful to illustrate, motivate, and inspire readers to better understand and appreciate a particular theory (Siggelkow, 2007). In this study, we used in-depth interviews with important stakeholders collected from the communities of Årdal (or Høyanger) and Nordfjordeid. The interviews were conducted with central actors (Latour, 2005). (Latour, 2005) defines the term “actor” as someone or something that “makes a difference” and can be people, animals, or objects. According to Latour, central actors are people or things that are important to a process and make a difference. Because the communities studied in this research are relatively small, they are easy to identify in terms of central actors and others involved in the process. In this project, central actors were participants from the local communities, local inhabitants, and renewable energy developers.

4. Drivers of and barriers to renewable energy: Four enterprise descriptions There are several examples of the development of renewable energy in Norway. In this section, we describe four examples of enterprises in RET. The first example pertains to Nordic Power Systems and involves bio-based fuel cells. The second example is a wind power park, established at Mehuken after two main construction periods. The third example is in fjord heating, and the fourth case comes from the solar cell industry. 4.1 Nordic Power Systems (NPS) 110


NPS was registered as a private limited liability company in October 2006. The company’s main purpose is to develop, produce, and sell power generators based on fuel cell technology, as well as related products and services. NPS is still in the development stage. Its social goal is to create workplaces in Høyanger and thereby increase the community resilience. This social goal is crucial in Høyanger because of heavy downsizing in the former cornerstone company, Hydro Aluminium AS. A local restructuring committee (LRC) was established in 2004 with the clear purpose of creating new workplaces to avoid the negative scenario described in the socio-economic analysis. Participants in the LRC were several stakeholders from the local and national levels. The cases the LRC dealt with were different business prospects proposed by nascent entrepreneurs, individuals, or groups of individuals who had ambitions to start a new company. In addition to the actors directly involved in the LRC, several other actors played important roles in the restructuring process, including the state and central authorities. Money for the restructuring was secured from the state (€4 million), Hydro (€8 million), and the county municipality (€1 million). Høyanger Municipality also added its own financial resources, approximately €250.000 per year. Thus, the main driving force in the NPS case was expectations of the social impact. During the restructuring period, the community confronted several barriers, both pertaining to the selection of projects to support and the monitoring of chosen projects. The NPS case also shows that it takes time to move from a prototype to a commercial product. Especially when the innovation is groundbreaking, the project owners and leaders must deal with a possible lack of legitimacy and knowledge. Although the LRC was highly competent, discussions were natural, and doubts about which projects to implement in the restructuring process arose. The technical complexity and what it takes to develop an industrial product were underestimated. This is a completely new industry, with few advisers to seek guidance from and few suppliers. Furthermore, as a result of the financial crisis in 2008, NPS was faced with more careful buyers, which tend to stick with existing solutions. NPS has made several prototypes, but the generator has not yet been put into commercial production. A by-product from the reformer is a technology for reducing nitric oxide and nitrogen dioxide emissions: Exhaust Gas Recirculation (EGR).The system was tested in a ferry in a fjord, and emissions were reduced by 44%. This product is ready for the market. However, as of November 2013, the generator project has been put on hold because of a lack of funding. More funding is necessary before the project can be resumed. The NPS now puts all its resources (money and employees) into the EGR system. 4.2 Mehuken wind farm Kvalheim Kraft DA is a dedicated wind power company. Since 2001, it has operated five wind turbines at Mehuken, and in the summer of 2010, eight more wind turbines came online. Altogether, the total rated power of the farm is 23 MW, with annual production of 65 GWh. Kvalheim Kraft buys fault rectification, security, and snow declaring services locally. It also uses firms located in the region for safety services, such as crane inspections and safety tests.

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Although wind power development is often a source of dispute (Rygg, 2012), the establishment of the Mehuken wind farm was rather painless. The key to its success has been attributed to Kvalheim Kraft’s close cooperation with local authorities, landowners, and the general population from the beginning. Inhabitants in the local community reacted positively to the wind farm project and, indeed, were involved in lobbying the county and national politicians to obtain public funding for the wind farm project. The main political argument for wind power investment in Mehuken was the need for more sustainable production of energy. The second argument pertains to the increase of economic activities locally (Rygg, 2012). Kvalheim Kraft succeeded by entering into useful dialogues with the local populace. Every stakeholder earns something on the project, which leads to little resistance locally. This is evidence by the distribution of revenue from the project. Our interviews with local inhabitants revealed that 0.02% of the turnover is paid as property tax to the municipality, 100,000 NOK (annually) is paid to fund a community house, and approximately 60,000 NOK is paid annually to each of the farmers involved. Thus, the project has a social profile. The Mehuken case reveals five important factors for implementing the wind power farm: competent, dedicated, and enthusiastic individuals; public funding; initiation of dialogue between the investor and the local community; a resonable distribution of income and benefits; and an external investor capable of raising financial capital. During the project period, three main problems arose: the need for public funding, technical problems, and environmental problems. Without an investment grant from Norwegian authorities, this project would not have been realized; because the fixed costs of the project are so high, the market prize of energy would not have been able to cover the costs. Furthermore, the project needed to change suppliers to avoid technical problems with the engines. Thus, selecting the right technical partner is a key issue in such projects. The environmental problems are not large at Mehuken. However, some environmental resistance in the neighboring communities exists. The main environmental argument has been the negative effect on nesting birds and thereby the more negative views from inhabitants in the neighboring community (Rygg, 2012). Thus, only the barrier of energy prizes mentioned in our theory discussion seems to play any role at Mehuken. The wind farm does not need any new backup energy system because its production goes directly into the existing Norwegian grid. Thus, the system changes deliver energy produced by hydrogen power or wind power automatically. As such, the barrier of advantages of the embedded incumbent technology does not play any role at Mehuken. 4.3 NorSun AS NorSun AS is a private limited liability company that produces monocrystalline silicon wafers for the solar cell industry. These wafers are used in the production of solar cells. The monocrystalline wafers have greater efficiency than multicrystalline wafers and can be sold at a higher price. The company’s production plant is located in Årdal Municipality in Norway. It was an external project brought into the community during a period of heavy restructuring as a result of downsizing in the cornerstone company, Hydro Aluminium. NorSun AS was founded by the Norwegian company Scatec in 2005. In 2006, Hydro invested heavily in NorSun, buying 16% of shares. NorSun began production of wafers in February 2008. By 2013, NorSun was still in operation, with approximately 112


175 employees in Årdal and another 10 in Oslo. SunPower is an important company, both as a supplier of raw materials (polysilicon) and as a customer, as is Sanyo. The number of employees at NorSun was reduced from a maximum of 265 in 2012, and total sales in 2011 amounted to approximately €100 million. The main challenge has been to make the business profitable (though operating profit in 2012 was said to be positive). This is due to intense global competition (e.g., from China). Prices fell 65% from 2010 to 2012, which proved difficult for the firm. However, falling prices have made the industry more competitive and less dependent on subsidies, which is good for the industry’s legitimacy. In Årdal, an LRC was established in 2004 with the clear purpose of creating new workplaces to compensate for the downsizing of the industry. The work was organized the same way as in the NPS example. Our findings reveal that the most important drivers in the NorSun AS case are that participants in the LRC had a wide range of competence and experience in business consulting, business leadership, political insight, and local advantages (e.g., technological environment, local industrial competence). Furthermore, the participants had good networks, both within politics at the national and regional levels and within business (e.g., through Hydro’s contacts around the world). Other important drivers are the entrepreneurs’ ability and willingness to go all out and the cornerstone company Hydro’s corporate social responsibility, in which it contributes with economic and human resources. Moreover, international contacts were important. During the start-up process, it was revealed that challenges also included obtaining venture capital, not only to attain the necessary start-up capital but also to attain several years of financing before the company could become profitable. This need took several rounds of fundraising because the costs were high and the prices were falling faster than expected. There was also a negative effect of the financial crisis— extension plans were dropped. Moreover, prices were falling faster than expected (they fell by 65% in two years), which proved a real challenge for the company. The economic results have begun declining as a result of the dramatic price reductions in the solar industry. NorSun has handled the situation by analyzing the whole value chain (purchase, production, and marketing) to enhance profitability. The company is renegotiating prices of raw materials, making production more efficient, and searching for new customers. 4.4 Fjordvarme Fjordvarme AS was established as a limited liability company in 2004 after a planning period of four years. The owner of the company is the local municipality in Norway. The idea is to extract heat from the fjord to reduce the cost of heating and cooling buildings. The company is a leader in developing large-scale concepts for extracting and using energy from the water in the fjord through a heat-exchanging system (“fjordvarme” means heat of the fjord). The company has developed new technologies and new ways of harnessing the energy in the fjord or other sources. The Fjordvarme AS heating and cooling system provides clean and renewable energy to businesses, public buildings, and private homes in the community center of Nordfjordeid in Norway, as well as several other places. Approximately 40 projects are already using the Fjordvarme system, with an average of a more than 50% reduction in energy use. Local engineers, developers, and building companies were employed to finish the project in Nordfjordeid. They also helped the municipality in 113


cooperation with engineering companies and energy companies. Running the system is fairly easy—it can be run by any local engineer. Our study revealed several positive drivers in the project. For example, the local hospital, which did not have an air-conditioning system, needed cooling in the summer, when the indoor temperature could reach high levels. Some local engineers believed it was possible to use the deep fjord as a source of cheap cooling. Furthermore, the municipality was able to fund the project alone, the inhabitants were involved in the project, and enough knowledge was available locally. The project had few barriers to address. It proved a little difficult to secure enough customers when the project was finished. The reason is that, on the one hand, customers needed to invest something to use the system, and on the other hand, they were not sure about the effect of the system. Fjordvarme AS has been running the system since 2004, and the system provides cheap heating to 80.000 square meters of buildings by using 47 heat pumps. Customers receive approximately 90% of the energy needed for heating or cooling from the system. Cooling is reported to be quite cheap. As one customer remarked: “Cooling is almost free.” Thus, customers can reduce the cost of heating and cooling by 30% to 50%.

5. Discussion and conclusion Research has previously described the drivers of and barriers to the transition of renewable energy. Smith (2012) argues that barriers to RET can basically be divided into three main categories: energy prize, intermittent supply of energy, and embedded incumbent technology. According to literature on institutional theory and entrepreneurship theory, drivers of RET can also be divided into three categories: environmental concerns, social impact, and secure supply of energy. However, several differences between practical cases might exist. In this study, we explored four cases of RET to identify why the projects emerged and the obstacles and barriers the projects faced during the project period. The driver that stands out as the most important is social impact. In all four cases, the community and municipalities have expectations of the social impact of the RET project, especially on employment. In contrast, environmental concerns do not seem to have any impact as a driver in the four RET cases. Indeed, none of the four examples of social enterprises report this cause as an important motivational factor in their projects. This might be because environmental concerns are usually more of a factor in urban than rural populations (Berenguer, Corraliza, and Martin, 2005). With regard to barriers, we found both similarities and differences among the four cases. The price of energy is a common barrier in all cases. At the wind power farm at Mehuken, the low energy prize level in Norway caused low expected return of investment. Therefore, the investment needed to be heavily subsidized by the government to be realized. With a higher energy prize in Norway, this subsidy could be partially or completely removed. This is a common problem in the industry and causes a low probability of large future investments in the wind power industry. However, any technological improvements, with cheaper technology, might lead to a different scenario. The prize barrier is also important in the NPS case, in which the biogenerator project has been put on hold because of a lack of funding. A higher 114


energy prize would move the project forward again. In the NorSun case, the falling price of silicon wafers has caused a challenging financial situation for the company. In this case, it is not the energy prize that causes the barrier but the falling world market prices on wafers. However, this technological change might make it easier to make decisions about future investments in solar cell projects, which in turn will lead to a higher RET. We also identified embedded incumbent technology as an important barrier in two cases. The Fjordvarme case had some problems getting enough customers because the customers needed to provide some investments to use the heating system. In this case, the existing technology had a comparative advantage because the fixed costs were already paid. The same barrier is also important in the NPS case, which had more careful buyers, which tend to stick with existing solutions, because of the financial crisis.

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