How a Coal Polluter’s New Strategy for Sustainability Transformed Its Business

Summary

HBR On Strategy: How a Coal Polluter’s New Strategy for Sustainability Transformed Its Business

Episode Overview:
In this episode of HBR On Strategy, Harvard Business Review delves into the remarkable transformation of Enel, Italy's state-owned power company, from one of Europe's largest coal polluters to a global leader in renewable energy. Through an insightful conversation with Mark Kramer, former Harvard Business School Senior Lecturer and co-founder of FSG, listeners gain an in-depth understanding of Enel's strategic overhaul, the challenges faced, and the innovative solutions that spearheaded its sustainability journey.

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1. Introduction to Enel’s Transformation

Enel, established in 1962, was historically one of Europe's most significant consumers of coal, contributing heavily to environmental pollution. By 2019, however, Enel had repositioned itself as a frontrunner in renewable energy, seamlessly integrating sustainability into its core business model and operations. This transformation is attributed to the visionary leadership of Francesco Seracci, Enel's CEO.

Key Highlights:

• Strategic Shift: Transition from coal-dependent energy production to renewables.
• Leadership: Francesco Seracci’s role in steering the company towards sustainability.

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2. The Landscape of Power Generation

Mark Kramer provides a foundational understanding of the power generation ecosystem, distinguishing between traditional and renewable energy sources.

Key Points:

• Types of Power Generation: Thermal (coal, gas), hydro, solar, wind, and nuclear.
• Cost Structure: Approximately one-third of power costs originate from generation, distribution at the wholesale level, and retail distribution.

Quote:
"There are, as you say, several pieces. ... the cost of your power is typically 1/3 from the generation, 1/3 cost from the distribution at a wholesale level, and 1/3 from the actual retail distribution."
— Mark Kramer [06:30]

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3. Regulatory Influences and Market Dynamics

Kramer contrasts the regulatory environments of Europe and the United States, highlighting how these influence the adoption of renewable energy.

Key Points:

• Europe’s Proactive Stance: Strong regulatory push towards reducing carbon emissions.
• U.S. Lagging Behind: Less governmental support and slower regulatory advancements under certain administrations.

Quote:
"The EU has been a very strong proponent of a shift to renewables and commitments about reducing carbon emissions."
— Mark Kramer [08:44]

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4. Enel’s Strategic Shifts and Innovations

Enel's transformation is dissected through several strategic maneuvers that facilitated its pivot to renewable energy.

a. Creation of Enel Green Power

Faced with significant debt from acquiring a Spanish utility, Enel's strategic response was to spin off its renewable operations into a separate entity, Enel Green Power. This allowed for focused investment and innovation in renewables without the constraints of the traditional power generation mindset.

Key Points:

• Debt Management: Leveraging renewable operations to create a new public entity.
• Cultural Shift: Establishing a distinct culture dedicated to renewable energy within Enel Green Power.

Quote:
"Because of this happy coincidence that they developed this separate Enel Green Power operation, they were able to create a new enterprise and a new culture that could become really adept at developing and promoting renewable energy."
— Mark Kramer [11:10]

b. Open Innovation Model

Recognizing the limitations of traditional R&D, Enel adopted an open innovation approach, inviting global solutions to its energy management challenges. This model facilitated partnerships with startups and external innovators, accelerating technological advancements.

Key Points:

• Collaborative Problem-Solving: Enel posted challenges online, allowing external innovators to contribute solutions.
• Successful Partnerships: Example of collaboration with a startup for two-way electric car battery-grid integration.

Quote:
"They set up a website, they've posted all of the problems they're working on, and they've said anyone in the world can submit answers."
— Mark Kramer [14:15]

c. Integrating Sustainability and Innovation

Under Seracci’s leadership, Enel merged sustainability with innovation, making sustainability a central driver rather than a peripheral initiative. This integration ensured that innovation efforts were aligned with environmental goals, fostering a culture of sustainable development.

Key Points:

• Sustainability as a Driver: Utilizing sustainability to fuel innovative solutions.
• Holistic Approach: Embedding environmental goals into the company's core strategy.

Quote:
"By pairing sustainability and innovation, he's done something that I haven't seen any other utility do, but really to use sustainability not as something peripheral, but as the driver of innovation for the company as a whole."
— Mark Kramer [13:49]

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5. Technological Innovations and Strategic Partnerships

Enel's forward-thinking approach extended to integrating electric vehicles (EVs) with the power grid, leveraging EV batteries as energy storage solutions to balance grid demand.

Key Points:

• Grid Balancing with EVs: Utilizing 5% of EV battery capacity to aid grid stability.
• Revenue Generation: Potential to generate $10,000 per year per car from this integration.
• Strategic Partnerships: Collaborations with Tesla and Google to advance electromobility.

Quote:
"Enel estimates that they can generate about $10,000 a year of revenue per car from merely having access to 5% of your car's battery to balance the grid."
— Mark Kramer [16:53]

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6. Overcoming Challenges and Adapting Strategically

Transitioning from traditional to renewable energy posed significant challenges, from divesting coal assets to navigating diverse global markets.

Key Points:

• Divestment Strategy: Commitment to cease new investments in thermal power plants while phasing out existing ones.
• Global Adaptation: Tailoring strategies to fit varied market dynamics in Europe, Latin America, and Asia.
• Infrastructure Considerations: Leveraging lower infrastructure costs in emerging markets to implement renewable solutions effectively.

Quote:
"At this point they still have a significant amount of their power generation that comes from traditional thermal sources, including coal. They are closing down those plants, but they're not yet at the point that they can eliminate them."
— Mark Kramer [18:18]

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7. Impact and Reception

Enel's transformation has not only positioned it as a leader in renewable energy but has also resonated positively with the new generation of MBA students, who are highly environmentally conscious.

Key Points:

• Educational Insights: Enel serves as a prime case study in creating shared value, demonstrating that large corporations can drive significant social impact.
• Inspirational Model: Enel’s success provides hope and a blueprint for other large enterprises aiming to integrate sustainability into their core strategies.

Quote:
"The fact that they can already be more than 50% renewables and have a commitment of going toward 100% renewables is really dramatic."
— Mark Kramer [21:16]

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8. Conclusion

Enel's strategic pivot from a coal-dependent utility to a renewable energy powerhouse underscores the transformative power of visionary leadership, innovative thinking, and strategic adaptability. By embedding sustainability into its core operations and fostering an open innovation ecosystem, Enel not only mitigated environmental impacts but also unlocked new avenues for growth and profitability. This case exemplifies how large organizations can lead the charge in addressing global sustainability challenges while remaining competitive in a rapidly evolving energy landscape.

Final Thoughts:
As Enel continues to navigate the complexities of the global power market, its journey offers valuable lessons for businesses worldwide on the integration of sustainability and innovation as central pillars of their strategic framework.

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Notable Quotes:

1. "They set up a website, they've posted all of the problems they're working on, and they've said anyone in the world can submit answers."
   — Mark Kramer [14:15]

2. "By pairing sustainability and innovation, he's done something that I haven't seen any other utility do, but really to use sustainability not as something peripheral, but as the driver of innovation for the company as a whole."
   — Mark Kramer [13:49]

3. "Enel estimates that they can generate about $10,000 a year of revenue per car from merely having access to 5% of your car's battery to balance the grid."
   — Mark Kramer [16:53]

4. "At this point they still have a significant amount of their power generation that comes from traditional thermal sources, including coal. They are closing down those plants, but they're not yet at the point that they can eliminate them."
   — Mark Kramer [18:18]

5. "The fact that they can already be more than 50% renewables and have a commitment of going toward 100% renewables is really dramatic."
   — Mark Kramer [21:16]

---

This comprehensive summary encapsulates Enel’s strategic transformation journey, highlighting the critical decisions, innovative approaches, and the overarching impact of integrating sustainability into business strategy. It serves as an inspiring blueprint for other organizations aiming to navigate the complex landscape of renewable energy and sustainable business practices.

Transcript

[Hannah Bates]

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[Mark Kramer]

Youm know there's another HBR podcast you might like. Coaching Real Leaders takes you inside real life leadership coaching sessions. Host Muriel Wilkins has advised CEOs for nearly 20 years. Listen in as she helps guests work through their hardest career challenges. Find new episodes of Coaching Real Leaders wherever you get your podcasts.

[Hannah Bates]

Welcome to HBR on strategy, case studies and conversations with the world's top business and management experts, hand selected to help you unlock new ways of doing business. Enel, Italy's state owned power company founded in 1962, started out as one of Europe's largest coal users and polluters. But by 2019 it was recognized as a leader in renewable energy and had integrated sustainability into its business model and its operations. How did it make that enormous strategic change? Today we bring you a conversation with former Harvard Business School Senior Lecturer Mark Kramer. He studied Enel's transformation into a renewable energy leader for a business case study he wrote. In this episode, Kramer shares Enel's tactics for strategic change, long range planning and tackling the dreaded innovators dilemma. This episode originally aired on cold call in April 2018. Here it is.

[Brian Kenney]

Pearl street in the Financial District in Lower Manhattan runs northeast from Battery park to Brooklyn Bridge. Dating back to the early 1600s, Pearl street cut through the heart of New Amsterdam and was named for the many oysters found in the East River. Today it looks like most every other street in Lower Manhattan. But on September 4, 1882, Pearl street shone brighter than any street in New York. I mean literally, because on that day, history was made when electrical power began to flow through an industrial sized direct current generator at Pearl Street Station, also known as Thomas Edison's first power plant. By 1884, Pearl Street Station was serving 508 customers with 10,164 lamps. In the years since that watershed moment, just about everything in the world has changed, but the way we generate and distribute electricity is still pretty much the same as it was 133 years ago. Today we'll hear from Professor Mark Kramer about his case entitled the Future of Energy. I'm your host Brian Kenney and you're listening to Cold Call.

[Hannah Bates]

So we are all sitting there in the classroom.

[Mark Kramer]

The professor walks in and they look up and you know it's coming.

[Hannah Bates]

Oh, the dreaded cold Call.

[Brian Kenney]

Mark Kramer is a leading researcher, writer and lecturer on strategies for social Impact. He also co founded fsg, a social impact consultancy that operates globally. Mark, thanks for joining us today.

[Mark Kramer]

Thank you. A pleasure to be here.

[Brian Kenney]

So I enjoyed reading this case. It got a little technical for me at times, but we're not going to delve into the deep technologies around power generation so much. But I think it'll be helpful for people to understand kind of the landscape of power generation and how things are changing on that landscape. So we'll get into all those details, but if you could start very simply by telling us who's the protagonist and what's on his mind.

[Mark Kramer]

Well, the protagonist is Francesco Seracci, who is the CEO of enel, which is the power company for Italy. And what's so remarkable to me about this case is the transition of an old fashioned state owned monopoly power company into really one of the leading innovators in renewable energy and energy services globally. And that transition is really due to the leadership and vision of Francesco Storacci.

[Brian Kenney]

What prompted you to write the case? How did you hear about N.L.

[Mark Kramer]

Well, so Michael Porter and I have been working on developing a case, actually a course on creating shared value, this concept that we've developed that kind of redefines the role of business in society to think about social issues as opportunities for competitive advantage, not just as a matter of sustainability or corporate social responsibility. And so we've been building up a set of cases and a course that exemplify how companies are finding new competitive opportunities by helping to solve social problems. And this was a great example of this in the power industry. There are so many power companies, particularly in the US that have really been resisting the shift to renewables, even though it's hard to argue that that isn't going to be the future.

[Brian Kenney]

Yeah, yeah. And I think, you know, probably most often power companies are thought of as culprits in a lot of the global warming issues that we have and the climate change issues that are going on.

[Mark Kramer]

Absolutely. And N.L. is no exception. They were one of the largest users of coal in Europe and, you know, a very heavy polluter.

[Brian Kenney]

Yeah.

[Mark Kramer]

But as there were more and more regulations and pressures around carbon emissions, they really had to shift away from that.

[Brian Kenney]

Yeah. And we'll talk a little bit about how Europe is looking at this versus the US too, because I think that's an interesting dimension that surfaces in the case as well. What are the sort of the main pieces of power generation and distribution?

[Mark Kramer]

Sure. So there are, as you say, several pieces. There's the actual generation of the power, and that can be thermal, it can be coal or gas fired turbines and generators. It can be hydro, which is using water power, an ancient form of power generation. It can be other renewables like solar and wind, and of course it can be nuclear. And once the power is generated, then there is an elaborate network to distribute it, first at a wholesale level and then down to a retail level. And so when you think about the cost of your power, it's typically 1/3 from the generation, 1/3 cost from the distribution at a wholesale level, and 1/3 from the actual retail distribution to individual businesses and consumers.

[Brian Kenney]

Yeah. And talk in the case about the cost plus system that the power generators use. Can you explain that?

[Mark Kramer]

Sure. So most power generators in the US and in Europe have their fees set by a regulatory body, since they are a monopoly, typically in a region. And the fees are set based on looking at the capital expenditures to build the power plant and distribution system and assume a recapture of that investment over the useful life of the equipment, plus a return on capital. So on the one hand, that makes a great deal of sense. These are very capital intensive industries, a huge investment, and so ensuring that the company is able to get back and recoup its investment with a profit makes sense. On the other hand, that tends to discourage companies from greater cost effectiveness or other innovations that might lower their cost base. And it has tended to discourage the investment in renewable power as well, where the initial investment upfront is much lower and the predictability of the return is much less.

[Brian Kenney]

So how do renewables start to surface? They've been around for a long time. This is nothing new, I guess, and probably to the frustration of some people who think, wow, it's been a long time and still they're only generating a very small percentage of the power that's used.

[Mark Kramer]

That's right. And that's certainly true in the US Although as you mentioned, Europe is a somewhat different model. And at this point, I believe Germany is roughly half renewables. And many other European countries have a much larger share of renewable generation. You know, the big story about renewables is the reduction in cost. In 1977, it cost $76 to generate a single watt of electricity from renewable power. Today that's 57 cents.

[Brian Kenney]

Wow.

[Mark Kramer]

We just had a major solar installation approved in Germany, which is the first time there was a major installation without any subsidy or guarantees. So we really are just now at the point where renewable power is achieving parity with other forms of power generation in terms of the cost, and that's a big deal.

[Brian Kenney]

Yeah. So in Europe there's a much greater presence and acceptance of renewable energy than there is in the us. What are some of the forces that are sort of controlling that on either side?

[Mark Kramer]

Well, the EU has been a very strong proponent of a shift to renewables and commitments about reducing carbon emissions. And that has been a big factor. I think simply the regulatory environment has been much stronger about promoting the shift to renewables in Europe than it has been in the U.S. there's also been a willingness of governments to step in and subsidize the cost to get to the point of parity that we've not had as much in the U.S. yeah.

[Brian Kenney]

And under the new administration in the U.S. it'll be interesting to see sort of where things go there. That's anybody's guess at this point, but it doesn't look favorable.

[Mark Kramer]

I guess we would say that it certainly does not.

[Brian Kenney]

Yeah. So let's talk about enel. Where did they come from and how did they sort of emerge on this landscape?

[Mark Kramer]

So Enel is a $90 billion global company. It started as a monopoly that was the state owned power generator for Italy. But over time, as the government liberalized power generation and began to create a competitive market, they had to find other ways to grow. And the government also shifted from this cost plus pricing model that we talked about to market based pricing. So the predictability of the profits was no longer as certain. And this deregulation happened throughout Europe. And so power companies that used to be limited to a particular country began to start buying power companies in other countries and become global. And so ENEL now is in 35 different countries as a major global player in power generation. What's interesting in their history is that when they acquired a major power generator in Spain, they took on a lot of debt. And there was a point in the late 90s where there was a real bubble in valuations for renewable energy. And some smart investment banker said, hey, you can pay down the debt that you took on acquiring the Spanish utility. If you take all the little renewable operations you have from all the different companies you've bought in all these different countries and create a new entity that is 100% renewables. Call it ENEL Green Power. Take it public, you'll get the cash to pay down the debt. Well, the consequence of that was that a new entity was created that was only focused on renewables and was staffed by people who were very different from the traditional utility executive in the old nl, people who are really committed to renewable power. And one of the fascinating differences is traditional power generation is all about a few massive capital Investments with a decade or many decades long return. That's highly predictable. Renewables requires much less capital investment. It is decentralized. There are countless players. Everybody can put solar on their roof. You don't need to build a power plant. And so it's a completely different vision of how to operate the company, how to make capital allocation decisions, how to develop strategy, et cetera. Francesco Storacci, the CEO, has said that you really couldn't develop a renewables company within a traditional power generator. It's just such a different mindset. But because of this happy coincidence that they developed this separate NL Green Power operation, they were able to create a new enterprise and a new culture that could become really adept at developing and promoting renewable energy.

[Hannah Bates]

Asana is where work connects. It's where projects, teams and company goals are seamlessly intertwined with AI to propel your organization towards shared success. See why they're the number one AI work management platform. Try for free [e-mail] that's asana.com.

[Brian Kenney]

So what are some of the challenges that they had in doing that? Like what makes it different in what way?

[Mark Kramer]

Well, it's different in almost every way. Again, instead of one major capital investment, a long term predictable return, you are looking at many, many small investments, many, many competing players. You have to be able to integrate the energy that is coming from multiple different sources and it becomes much more of a software driven enterprise. It's about how you manage and regulate energy services, the flow of energy, optimizing the usage, reducing the cost. And it's much more about the software and the distribution system than it is about the capacity to create a major power plant to generate the electricity.

[Brian Kenney]

Yeah, and a whole different view, I guess, of where sustainability sits within the organization. You know, you look at some of the major fuel companies in the US and a lot of them have sustainability programs of one kind or another. But they have been accused in the past of doing sort of greenwashing and not really making it a part of the culture of the organization.

[Mark Kramer]

That's right, and it's just fascinating. One of the changes that Francesco did, and I should mention he was the CEO of this NL Green Power, and then in 2014 he was appointed CEO of the entire NL Group and they reintegrated NL Green Power back into the group. And one of the things he did is combine sustainability and innovation because he said that the answers to sustainability really are about innovation and you can't innovate unless you're really trying to solve difficult problems. And so by pairing sustainability and innovation. He's done something that I haven't seen any other utility do, but really to use sustainability not as something peripheral, but as the driver of innovation for the company as a whole. Yeah, and he did a second thing there too, which is he recognized their own research and development department wasn't going to be able to compete in the global economy around software development and power management. And so he created this model that he calls open innovation, where instead of focusing on their own research and development team, they've set up a website, they've posted all of the problems they're working on, and they've said anyone in the world can submit answers, Their engineering team will review it and respond within 30 days. They don't want to invest in startup companies, but they will commit to buy anything that is developed that is of use to them. And by their scale, they can drive the growth of a new innovation. It turns out one of the critical pieces of software they needed that they didn't have an answer for was how do you create a two way connection between an electric car battery and the power grid so that you can not only charge the battery, but you can draw power from the battery to help balance the grid? Well, they didn't have the answer to it, but a six person startup that was spun off from the University of Delaware that had no revenue actually is the one that had the right technology and they were able to identify it through this open innovation system and now have a partnership with Nissan and with this little startup that is running 500 cars in Denmark with this two way connection to the grid.

[Brian Kenney]

So I thought that was fascinating.

[Mark Kramer]

What's fascinating is that one of the big barriers to going to 100% renewable power is the fact that it's intermittent. The wind and the sun are not there continuously all the time, and there just aren't adequate storage facilities or technologies to handle the volume of electricity that needed for an entire city. Well, it turns out the storage capacity of Teslas and other electric car batteries is so tremendous that with literally just about 100,000 Teslas and the ability to access only about 5% of the storage capacity of their batteries, you can actually balance the grid for a major city like Rome.

[Brian Kenney]

Wow.

[Mark Kramer]

And so you actually begin to generate revenue from accessing these car batteries. Enel estimates that they can generate about $10,000 a year of revenue per car from merely having access to 5% of your car's battery to balance the grid. And so they can begin to subsidize the sale of electric cars, which can then accelerate the move toward electric cars, which can then accelerate the move toward 100% renewables because you'll have adequate storage facilities. It's an amazing vision that Francesco Storaccio has.

[Brian Kenney]

It really is. So they are on the ground floor because all of a sudden now electronic vehicles are going to be much more popular and become affordable by more people. So they could really be at the beginning of a whole movement and be at the ground floor.

[Mark Kramer]

That's absolutely right. And they are creating an electromobility division that will focus on leasing and improving technology for electric cars. And they're doing it in partnership with Tesla, in partnership with Google. And again, what's so amazing is here's this 100 and some year old state owned monopoly, now a public company, but being at the forefront of innovation in this renewables technology and electric cars.

[Brian Kenney]

I'm sure they've thought about this. But what as they think about the future, at some point do they divest of all those capital intensive assets that they used to do traditional power generation?

[Mark Kramer]

Yeah. At this point they still have a significant amount of their power generation that comes from traditional thermal sources, including coal. They are closing down those plants, but they're not yet at the point that they can eliminate them. They have made a commitment going forward that they will only invest in new renewables. They will not invest in any more thermal power plants. And part of the reason for that is not just environmental, but is that the power industry is changing so rapidly. Now the idea of building a power plant and recouping the cost over decades no longer makes sense. Things are changing every year, every six months. And so they have to look at much shorter term investments, which renewables are.

[Brian Kenney]

Yeah. And do they have to sort of shape shift depending on where they are in the world? Because the case talks about some of the challenges they face in Latin America versus in Europe versus another part of the world.

[Mark Kramer]

They do, Absolutely. I mean, one of the interesting things about the power market is that in mature developed countries like Europe and the us, power consumption is actually declining. For decades there was a direct relationship between increasing GDP and increasing use of electricity. But as people have focused more and more on conservation and efficiency and reducing the cost costs of power, they actually are finding that there is less and less need for power to produce the same gdp. So the growth is going to happen in emerging markets. And those are a very different kind of market to work in than Europe and the US and other developed countries.

[Brian Kenney]

Yeah. And different regulatory bodies that you've got to contend with.

[Mark Kramer]

Different regulatory bodies. And of course Much, much less infrastructure. And so the idea of using renewables in Latin America, in Asia, and other emerging markets makes tremendous sense because the investment cost, the infrastructure, the distribution system is so much lower.

[Brian Kenney]

Yeah, that makes perfect sense. So have you discussed this in class?

[Mark Kramer]

I have. We had great fun teaching this with the MBAs.

[Brian Kenney]

Yeah. So I'm curious as to. And this is a generation of MBA students who are in the millennial classification. They are very concerned about the environment. How did they think about what ENEL was doing?

[Mark Kramer]

Well, I think they were very excited by it. I think all of the cases we studied in this course on creating shared value are really examples of companies that are seizing new opportunities to have a positive social impact that can drive the success of their business. A lot of them are interested in social enterprise and impact investment, but most of those deal with very small companies. And one of the things that's exciting about ENEL is this is a $90 billion company. This is not small. And the fact that they can already be more than 50% renewables and have a commitment of going toward 100% renewables is really dramatic.

[Brian Kenney]

Yeah. And it sort of gives hope for a brighter future on this front.

[Mark Kramer]

It does, absolutely.

[Brian Kenney]

Mark, thank you for joining us today.

[Mark Kramer]

Thank you, indeed. Pleasure to be here.

[Hannah Bates]

That was former Harvard Business School senior lecturer Mark Kramer in conversation with Brian Kenney on Cold Call. Kramer's research focuses on strategies for social impact, and he co founded fsg, a social impact consulting firm. We'll be back next Wednesday with another handpicked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you're there, be sure to leave us a review. And when you're ready for more podcasts, articles, case studies, books, and videos with the world's top business and management experts, find it [e-mail] this episode was produced by Ann Sani and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoke, Audie Ignatius, Erica Truxler, Ramsey Kabaz, Nicole Smith, Anne Bartholomew, and you, our listener. See you next week.