How Companies Map Their Path To Clean Electricity

While just 13% of America’s electricity comes from renewable sources, the figure is growing, driven in part by government regulations that require utility companies to produce a certain share of their output from renewable sources.^(a)

As companies move into the green electricity sector, they face a number of critical questions. Which technologies are most promising? Should they invest only in one type of energy source or spread their resources across a range of options? What will the clean electricity landscape look like several years down the line?

Examining how large utilities are making the transition into renewable electricity can illuminate how companies respond to government regulations and suggest the most effective ways for the government and private interests to steer the U.S. toward greater reliance on clean electricity. My research on the subject shows that factors like a firm’s past experience with various technologies, CEOs’ attention to different technologies, and regulatory uncertainty all play an important role in these decisions.¹ Experienced firms are likely to consider investments in technologies they have already used. On the other hand, firms with CEOs who have been paying attention to renewable electricity – but have yet to make major financial investments in renewables – and firms facing high levels of uncertainty are instead likely to consider investments across a range of technologies.

Before analyzing trends in the adoption of alternative electricity sources, it is important to identify why firms are motivated to invest in renewables. While consumer pressure, environmental ethics, and long-term strategic positioning can all be factors, a major motivator in many cases is government regulation requiring or encouraging investment in clean electricity. Twenty-nine states have now adopted renewable portfolio standards (RPS) that require investor-owned utility companies to provide a certain percentage of their electricity from a range of renewable sources by a set date. Another eight states have voluntary renewable goals.^(b)

Since RPS laws are increasingly prevalent and relatively similar in structure across states, large firms have a range of possible renewable options to consider, including wind, solar, hydroelectric, geothermal, and biomass. Firms expect to either self-generate the electricity, buy it from a third party, or do a little of both. At the same time, there is uncertainty about which technologies and generation methods will be cost-effective in the long run, how much electricity each type will yield (i.e. scalability), and how government regulations will look in the future. Change in the structure of RPS laws is an especially relevant issue, since the exact specifications for standards have been amended, sometimes multiple times, in 22 of the 29 states with RPS mandates. All these uncertainties, along with eventual deadlines for reaching RPS targets, have prompted companies to address the regulations by exploring multiple potential projects.

To understand how utility firms decide what clean electricity projects to pursue, I surveyed the industry about its response to RPS.² I focused on large, investor-owned utility companies that generate most of the electricity in the U.S. All 99 firms surveyed said they had set up an internal task force to inform decisions on clean electricity investment. These in-house groups used multiple sources of information – industry reports, information from trade groups, and government analyses – to learn about renewables. Additionally, half the firms in the survey sample also hired outside consultants to conduct part of their analysis. A few firms developed sophisticated quantitative modeling tools to evaluate how different technological options fit their needs and capabilities. For instance, a handful of firms used tools to find the right technology to match the weather patterns in a specific location. These considerations helped inform billion-dollar investment decisions.^(c)

While firms may use similar approaches to guide their decision-making processes, there are immense differences in how they ultimately pursue what they believe to be the right course of action when it comes to clean electricity. Companies that have prior experience with generating renewable electricity tend to focus on a smaller number of new projects. In some cases this tendency is driven by a strategy of building upon existing expertise, while other times it comes from an avoidance of options that have failed in the past.³

CEO preferences also have a large impact on what kinds of projects end up being considered. CEOs who paid attention to renewable projects prior to the enactment of RPS, but whose companies had not yet committed significant capital investments in the sector, ended up exploring a wider variety of options. This is likely because these CEOs and firms were already more convinced of the idea that renewables are an important industry niche and wanted to consider the full range of opportunities.

Firm decision-making is also influenced by the high degree of both technological and regulatory uncertainty in the renewable energy sector. In states with higher levels of uncertainty about future changes to RPS, firms hedge their bets by considering a larger number of potential renewable projects. This means a larger number of options are being assessed; it will be interesting to see if a larger number of projects are also implemented. Interestingly enough from a policy perspective, regulatory uncertainty pushes companies to experiment in new areas, which could ultimately be beneficial for the industry’s long-term health.

Examining how utility companies approach the transition to clean electricity can help us understand the growth of the renewable sector over time and evaluate the full impact of clean energy regulations.^(d) My research finds that when top utility managers and CEOs consider new directions to pursue, they draw from the firm’s experience, as well as their own preferences and beliefs about how the industry might evolve. Additionally, they are cognizant of the various kinds of uncertainty they must address over time and try their best to mitigate the effects by diversifying their approach. While regulatory uncertainty is often criticized, my findings suggest that it can lead firms to consider a broader range of options, a potentially valuable policy goal.