There is enormous value at stake in the energy transition as the world continues to move toward cleaner energy. Electrification and renewables, in particular, show accelerated growth, with electric power and hydrogen expected to represent 32 percent of the global energy mix by 2035 and 50 percent by 2050 (Exhibit 1). It’s hardly surprising that energy incumbents are entering this new energy space. The potential 2030 market opportunity in new energy businesses is estimated at $3 trillion, with top energy majors expected to make an average investment of $35 billion between 2022 and 2030.
As many energy majors embark on their own new energy business ventures, an important question on their minds is whether they can strike the right balance between dependence and independence, harnessing the advantages of being an incumbent while enabling the agility of a start-up.
With new energy businesses in their early days, there are no definitive answers to this question of independence or integration; different types of new businesses are seeing initial success with different operating models. However, there are key choices and considerations that can help incumbents avoid the most common pitfalls of business building. This article explores the different operating models chosen for new energy ventures by companies with an established incumbent business (for example, oil and gas and utilities).
Why the right choice matters
Leaders can underestimate the difficulty of starting a new venture within the boundaries of existing processes, systems, culture, and behaviors. New businesses often fail to scale. Only 16 percent of executives in Fortune 100 companies report that their corporate business builds have achieved blockbuster success after four years. The remainder were partially successful at best.
Disruption was once considered the domain of start-ups. Today, however, incumbents are actively using this strategy themselves to disrupt the industry. Incumbents are rightly asking how to strike the right balance between dependence and independence when it comes to their new energy business.
The pressure to make the right choice is enormous, given its impact on operational performance. Clear prioritization and end-to-end accountability for business units and teams, for example, can drive an uplift of more than 30 percent in operational performance. Ensuring purpose and the ability to operate autonomously to get things done can increase employee engagement by 30 percentage points. And creating teams of doers and removing red tape can turn plans into action five to ten times faster than if the incorrect operating model has been chosen.
Weighing the options
Corporate structures for new energy businesses range from full business separation to full integration within the core business, each with its own benefits and risks.
Full separation
In separation model, the new business can be set up as a separate entity (such as a subsidiary). As a subsidiary, the new business has its own legal and financial structure, leadership team, processes, and people model. In many cases, it is largely funded by the parent company but often attracts additional external funding and partners (see sidebar “Case study: Eni creates an independent renewables business—Plenitude for an example of this approach).
An alternative approach is to form a partnership with an existing renewables venture. The incumbent often provides the brand, access to customers, capital, and seconds specific key capabilities into the venture while the renewables venture provides the lean governance, processes, and culture required to grow at pace (see sidebar “BP partnered up with a renewables venture” for the story of how BP formed a joint venture to accelerate their solar business).
Integration into the existing structure
Many incumbents choose to set up a new energy business within their existing structure, with varying degrees of independence. The level of independence may vary over time, driven by the maturity of the business, the type of technology, and perceived synergies with the core business (see sidebar “EDP Renewables goes through a journey with varying levels of integration over time” to read the story of how EDP evolved the level of integration of their renewables business over time). This is a choice we also see in Equinor and others where the business is kept closer to the core when incubated and, over time, given more independence as it matures.
A more integrated new energy business, especially in the early phases, allows incumbents to provide their new ventures with advantages not available to an independent venture. These include customer access, brand recognition, negotiation leverage, stakeholder relations, existing base of suppliers, talent, intellectual property, distribution capabilities, as well as easier access to capital.
There is still a spectrum in terms of the level of integration across five relevant dimensions: steering model, who sets targets, capital allocation process, talent approach, and operational processes (Exhibit 2).
The first factor to consider is the steering model of the new business. In addition, incumbents need to decide what level of control the core business will have over the new energy business, and which part of the business sets the strategy and targets for the new venture. Capital allocation needs to be considered as does the talent approach. Where will the new energy venture source its talent and capabilities—from within the core business or from outside the core? And, lastly, what are the operational processes that the new venture will use, and specifically, which parts of the business are involved in project delivery?
Organizations make different choices on each of these five dimensions when setting up their new energy business. However, for capital allocation, we do see a trend that the large majority chooses to allocate an envelope to the new business with stage gates to release funding. For their talent approach, many of the oil and gas majors start out using a very integrated HR process but over time move to more independence for the new businesses.
Integrating a new business into the core traditional business of an incumbent does not come without risks. It is important to make sure entrenched ways of working, relatively cumbersome processes (compared to those of a start-up), cultural norms, and mindsets do not hamper the success of the new venture. Incumbents must be mindful of the risks and purposefully mitigate those.
Based on our experience, eight imperatives are starting to emerge that leaders could consider when starting a new business that is integrated within the existing business:
- Avoid short-term earnings pressure. Start-ups often prioritize market share and scale over short-term profits. If a parent company pressures its new businesses to meet return thresholds similar to the parent company’s, they are more likely to make decisions that limit long-term prospects.
- Provide rapid access to capital. Access to capital is fundamental for scaling. The operating model could facilitate securing the necessary funding for projects, whether through internal resources, external investments, or partnerships. Financial flexibility is key to seizing growth opportunities when they arise.
- Allow customization of core processes and project design. Streamlining operational processes is essential for cost-effectiveness and scalability in a low-margin industry (especially compared to major capital projects in oil and gas). Lean and efficient processes help manage project delivery, reduce overheads, and allocate resources effectively. In addition, designing projects with scalability in mind is essential. The new business could be set up to replicate successful project models in different markets, minimizing the need for reinventing the wheel.
- Create shortcuts for decision-making processes and avoid red tape. A parent company’s bureaucracy can limit the ability to make quick decisions. The new business could be allowed to make swift decisions without being bogged down by bureaucratic processes. A streamlined decision-making framework accelerates the response to market opportunities and challenges.
- Freedom in talent acquisition and retention. Attracting and retaining top talent is crucial. The setup could enable the new energy business to recruit skilled professionals who are passionate about the renewable energy sector. Offering competitive compensation, growth opportunities, and a compelling employee value proposition (EVP) is vital to building a talented workforce.
- Allow for partnerships and ecosystem integration. Building strategic partnerships within the new energy ecosystem can accelerate growth. Collaborating with other industry players, research institutions, and start-ups can provide access to complementary capabilities, technologies, and markets.
- Autonomy when setting up enabling services and platforms. Our research shows that successful business builders grant their new businesses considerable autonomy in core IT, marketing, data and analytics, and HR while making sure the new business stays aligned with the overall strategy of the company., McKinsey, December 6, 2021.
- Entrepreneurial culture, aligned with the values of the parent company. Ensure that the new business’s culture, while different, aligns with the mission and values of the parent company. A cohesive cultural framework fosters collaboration, knowledge sharing, and a sense of purpose.
By carefully considering these critical factors, incumbents can position themselves for rapid growth and success in a competitive and evolving industry.
The first steps for incumbents
Choosing an operating model for a new energy business isn’t a matter of right or wrong—it’s about being clear on the choices and consequences. Striking the balance between dependence and independence to harness both the strengths of incumbency and the agility of start-ups is a complex challenge. The next steps for established energy majors involve carefully weighing the options, understanding the spectrum of integration, and mitigating potential risks.
To navigate this transformative journey successfully, leaders can consider various factors, including how much the new venture would benefit from customer access, brand recognition, negotiation leverage, stakeholder relations, existing base of suppliers, talent, intellectual property, distribution capabilities, as well as easier access to capital. They can also ask whether any of these benefits can be provided while balancing the need to create a lean, fast-growing organization with a different metabolic rate than the traditional business.
Once the corporate structure and level of independence versus integration have been chosen and the business has started, the next questions arise. How do you accelerate growth and scaling in terms of project pipeline, required workforce, and capability building?
In terms of growing rapidly, new businesses can look at acquisitions as one potential avenue for accelerating growth. An acquisition not only provides access to physical assets and partnerships, it also offers access to a new talent pool when executed well. For example, new businesses were 25 percent more likely to significantly exceed expectations when they made two acquisitions early in the scaling process compared to businesses that made no acquisitions or that made three or more. The new venture may need an “acquisition playbook” to ensure successful integration and retention of talent and constant screening of acquisition targets.
For talent strategy, the new business could focus on improving its EVP scores to attract and retain talent. Leaders could consider their EVP right from the start by designing an action plan that gives them a talent advantage.
On the leadership front, leaders need to operate with substantially greater speed and entrepreneurialism when entering the new energy sector. They may need to develop innovative ways of collaborating, both within their organizations and in the emerging energy ecosystems. A major challenge is attracting and retaining talent in an environment where traditional energy companies are under intense negative public pressure. These leadership challenges will be more keenly felt in the more integrated operating model, where leaders have to be the bridge between the old and new worlds.
New energy businesses have the potential to thrive, and many incumbents are eager to enter this high-growth space. The operating model that energy players choose can directly impact the success of their new business, and incumbents need to decide what strategy would best suit their business needs. This decision is only the beginning, but it can pave the way for future success.
