Mecanismos patofisiológicos de la artrosis

Energize’s effort to establish itself as a renewables-only energy supply company was embedded in a network of business relationships with the actors introduced above. Figure 13 shows this business network and the associated interactions taking place.

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Throughout the two years of interactions within and across this business network, I focus on the five key relationships held by Energize. Delineating the interactions in and around these relationships enables me to develop a holistic understanding of how companies respond to climate change.

5.3.3.1 Relationship 1 (R1): The MDfE shifts its priority towards the security of supply

The first relationship that affected Energize’s effort to establish itself as a renewables- only energy supply company was with the MDfE. The MDfE had responded to climate change by making it ever more costly to generate energy from fossil fuel sources. Soon,

Energize and other energy supply companies decommissioned approximately 24 GW of fossil fuel generation capacity; equivalent to over one-third of the UK’s total energy demand.

The increase in renewable generation capacity partially compensated the decline in fossil fuel generation capacity. Renewables, however, were not able to cover this shortfall in its entirety which led to tightening capacity reserve margins of around 5% in late 2014. As a result, Mygrid sent a Notice of Inadequate System Margin to the MDfE to highlight that the UK’s total energy supply capacity would not suffice to meet peak demand, typically occurring during cold and windless days, in the upcoming winters.

The Secretary of State took this warning seriously as there was nothing worse for her than being responsible for a large, country-wide energy blackout. This meant that after years of encouraging energy supply companies to decarbonise their energy generation portfolio, the MDfE suddenly had to cope with an additional challenge: safeguarding the security of supply. Scott, Head of Energy Security at the MDfE, explained that in a matter of weeks the department’s priority had shifted towards energy security:

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“She [the Secretary of the State] is very clear on this point, energy security is her absolute number 1 priority for the department, and that’s something that the Prime Minister has reinforced as well.”

[Scott, Head of Energy Security, MDfE]

Over the past years, the MDfE had created a regulatory framework that simply did not incentivise energy supply companies to invest in providing an energy supply capacity sufficient to meet the UK's energy demand:

“There is a significant risk that the market will no longer deliver an adequate level of security of supply as it has done historically, principally because potential revenues in the energy-only market may no longer incentivise sufficient investment in capacity.” [Report, MDfE]

Energize itself is the best example of this as it indicates how and why an energy supply company would decide to invest in renewable energy generation instead of providing a large capacity of fossil fuel generation assets.

Within months, the Capacity Market Mechanism, a policy to attract private investment in reliable generation capacity, was designed and implemented. Under this new regulation, energy supply companies would receive payments for safeguarding energy supply during times of peak demand. In an attempt to deliver the security of supply at “the best value for money” [Scott, Head of Energy Security, MDfE], the MDfE allowed all types of energy generation to apply for Secured Capacity Agreements.

Energize, still experiencing shareholder pressures due to the continuing decline of the company's share price, was keen to cash in on its £750 million investment in a coal-fired power plant. CEO Walter perceived that generating an additional revenue stream was a one-time activity that allowed the company to boost its profitability alongside transitioning towards establishing itself as a renewables-only energy supply company.

Energize therefore prepared and submitted a competitive bid proposing one of its two GW coal-fired power plants in North England (sufficient to power two million homes

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annually) as an asset available for providing a secure and reliable supply of energy in return for guaranteed capacity payments.

5.3.3.2 Relationship 2 (R2): Mygrid awarding Energize a Secured Capacity Agreement

The MDfE appointed Mygrid, a multinational energy distribution and transmission company with expertise in balancing energy supply and demand in the grid, to deliver the

Capacity Market mechanism. Within Mygrid, Capacity Market Manager Emma swiftly set up a process that allowed procuring sufficient capacity at the lowest possible price.

In early 2016, just after Energize had officially spun off its fossil fuel generation assets into a new company, Emma and her team met with Scott, MDfE's Head of Energy Security, to announce the energy supply companies that were successful in securing capacity agreements:

“We managed to secure enough capacity to meet this winter’s needs. We’ve effectively got confidence in our capacity procured up until the end of 2020/2021 now.” [Emma, Capacity Market Manager, Mygrid]

She concluded that the Capacity Market mechanism was delivering the results that the

MDfE was looking for:

“It gets the right results and ensures that the capacity that’s coming forward will be able to deliver on the day. So I think that’s been a great success.” [Emma, Capacity Market Manager, Mygrid]

In light of the inherent focus on delivering the security of supply at the lowest cost, it was largely unsurprising that coal-fired power plants were the big winners of the Capacity Market Mechanism. Indeed, over the next four years, energy supply companies were due to be paid a total of £453 million in secured capacity payments for operating coal-fired power plants.

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Energize was successful in securing a supply contract for its two GW coal-fired power plant. Soon, Energize's coal-fired generation assets, now strengthened by a Secured Capacity Agreement, became one of the company’s most essential earnings driver. As such, Ben, the Head of Orientation at Energize, indicated that investment in fossil fuel generation assets were back on the company's agenda as long as it was for the purpose of safeguarding the security of supply:

“An investment in higher carbon isn't necessarily a good idea unless it is about the security of supply.”

[Ben, Head of Orientation, Energize]

5.3.3.3 Relationship 3 (R3): Consumers demanding low energy bills

The role of end consumers in shaping Energize's attempt to establish itself as a renewables-only energy supply company cannot be overlooked. As highlighted in the introduction to this case, over the past decade, consumers of energy had become increasingly price-sensitive and open to switching their energy suppliers. In fact, the

MDfE’s 2016 annual Energy Consumption Survey found that the key aspect when choosing an energy supplier was the energy price. Adam, Analyst at the MDfE, summarised the department's findings:

“Everybody’s thinking about energy has become so absolutely focused on what the final bill is because the argument is that’s the only bit that consumers really care about.” [Adam, Analyst, MDfE]

The consumer focus on energy prices posed a risk to Energize. It meant that if the company's strategy to focus solely on renewables increased the energy prices, then

consumers were more likely to switch to competitors such as AMP. Ben, Head of Orientation at Energize, said that the company's challenge was to ensure that consumer

bills do not increase while racking up the investments necessary to establish the company as a renewables-only provider of energy:

“Broadly speaking investing in a low carbon kind of portfolio is good [...] but we have to prove the benefit to consumers.” [Ben, Head of Orientation, Energize]

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5.3.3.4 Relationship 4 (R4): Energize and AMP competing for market share

The increasingly price-sensitive behaviour of consumers outlined above led to price competition between Energize and the multinational energy supply company AMP.

Energize and AMP were battling for market share, which was driven mostly by which company could offer the lowest energy price. While the senior leadership team of

Energize was occupied with restructuring the company, AMP continued to focus on the security, reliability and cost-effectiveness of fossil fuel generation assets.

Simultaneously, AMP only grew the proportion of renewables as part of the company’s overall energy mix by as much as needed to meet the quotas set in the Renewables Obligation. To do so, in 2014, AMP began with the construction of three large-scale wind parks in the UK. This additional source of renewable generation capacity allowed AMP

to meet the renewables quotas set in the Renewables Obligation. By 2016, the approach taken by AMP turned out to be a major price advantage, particularly as the MDfE became increasingly concerned about the security of supply. Indeed, AMP’s low-cost utilisation of its existing fossil fuel generation capacity translated into a major cost advantage over

Energize’s renewables-only energy generation portfolio.

5.3.3.5 Relationship 5 (R5): Purchasing emission allowances under the EU ETS

The fifth and final relationship that affected Energize’s effort to establish itself as a renewables-only provider of energy was with the EU ETS. As outlined in the introduction,

Energize’s senior leadership team feared that the pressures stemming from environmental regulation would make it more and more costly to operate the company’s carbon- intensive generation portfolio. At the time, CEO Walter perceived that the spot price for one EUA would increase far beyond its 2008 levels of around €30. Hence, he supposed that operating a carbon-intensive energy generation portfolio would unavoidably hamper

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Energize’s profitability. By September 2016, however, the price of one EUA had dropped to €3.91. Unsurprisingly, CEO Walter concluded that purchasing the emission allowances necessary to win further security of supply contracts under the Capacity Market Mechanism was permissible to ensure reliable revenue streams.