Surviving regulation: how European energy industries are adapting to new rules

Abstract

PurposeIn Paris, in 2015, 195 countries agreed to limit the emission of CO2. The German Energiewende is an example of the types of regulatory changes that countries will need to enact to meet their Paris commitments. The Energiewende saw the German Government forcefully shift the energy base from non-renewable to renewable sources to reduce CO2 emissions, and the effect of this was to reduce the market value of some German energy firms by as much as 70%. This paper aims to consider the strategic options available to energy incumbents facing the sort of regulatory challenges implied by the Paris agreement.Design/methodology/approachThis paper is a literature review and a thought experiment, in which, 12 fields of strategy research are reviewed, and using the insights obtained from these fields, four strategic options are proposed for the energy incumbents, namely, “fight,” “flight,” “fit” and “follow.” Each strategy is introduced and evaluated, and, by looking at examples from other industries, the viability of that strategy for the energy industry is concluded.FindingsOf the four strategies identified – that is, fight (lobbying), flight (internationalization or diversification), follow (imitation) or fit (adopt a core competencies perspective that re-imagines the firm) – it was concluded that only the last is feasible. The present review, and the application of the discussion to the energy industry, suggests that “fight” is viable only in the short term as a delaying strategy; “flight” is a value-destroying strategy, and, therefore not a real option for the energy industry; “follow” will lead the energy incumbents to lose their current positions of power; and only “fit” will allow the energy incumbents to remain viable in the long term.Research limitations/implicationsAll research has its limitations. The main limitation of this research is the fact that this study is a thought experiment based on a literature review. The suggested strategies are forward-looking, but are based on historical examples, and are intended to guide the energy incumbents, even when they are based on non-energy examples. The reader should view this paper in that light.Practical implicationsThe practical implication of this research is that, of the 12 fields of strategy that it reviews, there is only one feasible strategy for the energy incumbents looking to survive the sorts of regulatory challenges implied by the Energiewende and the Paris agreement. The research suggests that many/most/all of the energy incumbents will, at first, choose a “fight” strategy, but in the long term only those that choose for a “fit” strategy will survive the sort of disruptions implied by these regulatory changes.Social implicationsThe social implications of this research are that many/most/all firms in the affected industry will go through a predictable process, of first resisting the change, before eventually supporting it; that “flight” is not a viable strategy; and that radical innovation rarely comes from incumbents. Policymakers should be aware of these facts when not only working with incumbents to develop the regulations necessary to meet the Paris climate commitments but also looking at the impacts of regulation and when trying to “pick winners.”Originality/valueThe paper reviews the existing literature, and the review is not new. The application to a specific industry and the advice gleaned from this for managers and policymakers is new and of high value.