True Energy Leadership

Several times, I have said that I would like to see some energy company step up and really lead the way toward a sustainable energy future. Not just pay lip service, not just make a few investments in renewables to put into the annual report, but truly take an active role in leading society towards sustainability. I think I may have found that company and that leader in the first of two webinars I recently watched which were broadcast by the Yale Center for Business and the Environment.

That webinar consisted of an interview with David Crane, CEO of NRG Energy, the second-largest power producer in the United States. Mr. Crane comes across as anything but radical. Unassuming and easy-going, he speaks more common sense about energy policy than just about anybody I have heard. He fully understands that the global energy base has to shift to one that is sustainable in the long run, but equally well understands that we have to keep the lights on throughout the transition, and do so in a way that minimizes the disruption to people’s everyday lives. The move to clean energy is triggering the proverbial mother of all change management problems.

This does not, however, mean avoiding disruption to specific industries. Mr. Crane is more bullish on distributed solar power (i.e., rooftop solar panels) than he is on utility-scale solar power (like huge photovoltaic and solar-thermal farms in the desert that hook into the grid). His primary reason for feeling this way is that utility-scale solar has to use the incumbent’s power distribution grid, and incumbents are notoriously resistant to change. He described this as “an entirely opaque system completely controlled by people who do not want you to succeed” [may not be an exact quote; I was taking notes as best as I could].

But there are other advantages to distributed power, too, not the least of which is that it is far more disruptive to our decades-old power system. Utility companies and coal miners may not like it, but our huge-power-plants-feeding-an-enormous-distribution-grid model is long overdue for a complete overhaul. It was a great way to start – in fact, it was probably the only way to implement nearly universal access to electricity in a country as vast as ours.  And universal access to electricity has arguably done more to improve the quality of life for American citizens than almost anything else in history. However, that period of history has passed. In today’s world with today’s technology and long-term environmental concerns, the power grid approach is inefficient, environmentally unfriendly, and frighteningly fragile. The U.S. government has identified our power grid as the number one national security weakness. A distributed system is not only cheaper and less environmentally damaging in the long run, it would be much more difficult if not impossible to bring down.

So is Mr. Crane shutting down big power plants and putting solar panels up all over the place? No and yes. About 70% of NRG’s annual capital budget is spent on core businesses – i.e., keeping the lights on. This still means large, centralized power plants, and although NRG is moving away from coal-fired plants, they still own and operate quite a significant number of them. Another 20% of the company’s capital budget goes into alternative energy with a proven track record of growth – e.g., big solar projects (by the end of 2015, NRG will be the second-largest installer of solar power in the U.S.). That leaves 10% for what Mr. Crane calls “moon shots” – cutting edge technologies that may or may not work out, but if they do, they are true game changers (like electric vehicle charging stations). He points out that if twenty years from now electric vehicles represent 25% of the vehicles on the road (as some have forecast) and NRG is the dominant player in EV charging stations, “we’ll be printing money.” That’s not a certainty, of course; Mr. Crane is using option thinking and positioning NRG to take advantage of the potential if this situation arises.

When questioned about whether these are radical ideas, Mr. Crane’s response was that given the risks associated with continuing along our current path, “Doing nothing is radical.” I couldn’t agree more.

The second webinar was a similar interview with Matt Arnold, Managing Director and Head of Environmental Affairs at JPMorgan Chase. Mr. Arnold does come across as a bit of a radical, albeit one who has decided to work the problem from within the system, rather than from without (he described going for an interview with Greenpeace in his early days wearing a suit and tie, and being looked at like he was from another planet. He says that’s when he realized that maybe chaining himself to things wasn’t his style). Where Mr. Crane appears to be a traditional capitalist businessman who became convinced that consideration of long-term environmental impacts needs to play a greater role in business strategy, Mr. Arnold seems to be an environmental activist who realized that there are tradeoffs around every corner, and that the best way to be an agent for change was to work with powerful business interests, rather than trying to demonize them.

Mr. Arnold’s philosophy fits well with the one espoused by Paul Hawken in The Ecology of Commerce: We need to change the way we conduct commerce in order to ensure the long-term viability of our society; industry is the only entity with the power to change how we conduct commerce; therefore, it is up to industry to do so. Mr. Arnold talked about the evolution he has witnessed in Sustainable Finance. Initially, it was simply about Regulation.  As people saw that conservation and waste reduction actually pay for themselves, it was put into the context of Cost Management. More recently, the looming probability of ecological disaster (or at least increased frequency of natural disasters) has framed Sustainability in terms of Risk Management. And now we are finally realizing that a successful Sustainability strategy must generate Growth – and conversely, if you want long-term Growth, Sustainability must be a key feature of your strategy.

Perhaps more so than most other industries, finance relies on trust. A lender has to trust that a borrower will repay the loan, and the investing public has to trust the finance firm to use good judgment when making loans. But as Mr. Arnold points out, “good judgment” – what he referred to as “competence” – is only one criterion used by investors; the other is “ethics.” Investors need to be able to trust the finance firm to make appropriate ethical decisions, too. Mr. Arnold spoke quite openly about how JP Morgan initially gained trust during the financial crisis for their competence (the well-run bank that could bail others out), but then lost trust as news surfaced about some dealings that were on shaky ethical ground.

I like bringing trust into the discussion because it dovetails with my previous statements regarding Referent Power. This is the power that an individual, a company, or an organization has because of their reputation or brand; people are willing to follow your lead, buy your product, or exhibit loyalty to you because of who you are and what you represent. It is the strongest of the bases of power, and as I’ve stated before, I believe there is enormous referent power to be had by those companies like NRG (and apparently JP Morgan Chase, too) that lead the way to a sustainable energy future. I wish them nothing but success.