Incumbents in the Energy Transition: how Electric Utilities adapt to their Changing Business Environment

Abstract

The energy sector is currently undergoing a fundamental transition. Triggered by the idea of climate change mitigation and political discussions about a nuclear phase-out, the sector has experienced a pronounced shift towards CO2-neutral power generation and energy efficiency. Along with this technological shift, there have also been attempts to (partly) liberalize the power markets. These developments---known as the energy transition---challenge incumbent electric utilities, which are used to operating in a fairly stable business environment. In addition, wholesale power prices drastically declined after 2008, increasing the pressure on electric utilities' traditional business models even further. The empirical evidence on whether incumbents facing drastic changes in their business environments are able to cope with these changes is mixed. Despite the existence of case studies that depict both successes and failures by incumbents in the energy industry, a detailed understanding of how electric utilities adapt to the energy transition is still missing. In order to survive, incumbents need to respond to the new environmental demands with a new strategy, namely new business activities. However, literature shows that such an adaptation must go hand in hand with adapting the organization's cognition. To be successfully launched, new business activities need to serve a new organizational purpose and match new organizational capabilities. For both the establishment of a new organizational vision and a capability reconfiguration, complex cognitive processes on all levels of the organization's hierarchy are involved. This dissertation covers both the question of how electric utilities strategically adapt to the energy transition and also how electric utilities adapt their cognition to the new environmental circumstances. The thesis consists of four individual papers that each targets a specific literature gap. Paper 1 investigates how the biggest electric utilities worldwide have adapted their business portfolios during the energy transition, and paper 2 analyzes the role of electric utilities in one of these new business activities---green power trading---in more depth. Papers 3 and 4 then look into cognitive intra-organizational adaptation processes. While paper 3 investigates drivers of the perception of ideal and current organizational identities on all hierarchy levels of an electric utility, paper 4 engages with the drivers of the perception of organizational capabilities needed for the new business environment. To answer these questions, this thesis draws on different data sources, namely, archival data, expert interviews, and survey data, and different methodological approaches, namely text analysis, descriptive quantitative assessment, and structural equation modeling. I find that incumbent electric utilities can indeed make use of their existing assets and capabilities to face the energy transition. However, the energy transition turns out to be a multilayered transition containing more than just one discontinuity. This results in electric utilities embracing some elements of the transition while resisting others. Regulations and policy instruments can definitely help steer incumbent electric utilities towards strategically adapting certain elements of the energy transition. Despite this fact, whether or not organizations successfully adapt to environmental discontinuities also greatly depends on organizational cognition. This is because employees of incumbent organizations can develop different interpretations of the environmental changes, despite facing the same situation. Different interpretations lead to differing degrees of embracing or resisting the energy transition. This thesis depicts approaches that incumbent electric utilities can use to adapt their organizational identities and capabilities. It reveals two main findings regarding organizational cognition: First, because of an organization's heterogeneity, shaping an organizational identity is complex and even involves paradoxical sensegiving strategies. Managers wishing to change an incumbent organization's identity need to communicate in a much more nuanced and tailored way than expected. Second, successfully reconfiguring organizational capabilities involves not only changing organizational routines, but also the organizational vision, which importantly serves as an objective for routine changes.