{"id":9000,"date":"2016-11-04T17:51:11","date_gmt":"2016-11-04T21:51:11","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/trouble-at-mitsubishi-power-plant-business\/"},"modified":"2016-11-04T17:51:11","modified_gmt":"2016-11-04T21:51:11","slug":"trouble-at-mitsubishi-transforming-power-plant-business-portfolio","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/trouble-at-mitsubishi-transforming-power-plant-business-portfolio\/","title":{"rendered":"Trouble at Mitsubishi (Transforming Power Plant Business Portfolio)"},"content":{"rendered":"

Power Generation Now & Future<\/u><\/strong><\/p>\n

Isn\u2019t it striking that power generation by renewable energy accounts for still only 6% globally? 67% of power is generated by fossil fuels even today. Perhaps, some might feel that it has been quite a while since we started talking about renewable energy, leading to a prevailing skepticism whether renewable energy can really take over traditional energy sources\u2026<\/p>\n

However, in reality, the situation is gradually changing \u2013 partly backed by technological improvement [1], it is estimated that 48% of power generation will be done by renewable energy in 2050. How much do you think our power will be from traditional fossil fuels in 2050? The answer is only less than 20% [2].<\/p>\n

\"graph1\"<\/a><\/p>\n

 <\/p>\n

Fossil-fuel Power Plant<\/u><\/strong><\/p>\n

Fossil fuel used in power generation includes mainly coal and natural gas.<\/p>\n

(1) Coal:<\/strong><\/p>\n

For those who might be skeptical about the trend shift from fossil fuel to renewable, it might be surprising that use of coal in power plant has peaked out already, estimated to decrease its share as the fuel year by year going forward [2].<\/p>\n

(2) Natural gas:<\/strong><\/p>\n

Often\u00a0perceived as more eco-friendly fuel [3], natural gas will keep its popular position as a popular cleaner source of energy especially by emerging economies; however, it is estimated that even natural gas will peak out its share as the fuel circa 2030 [2].<\/p>\n

While this trend is discussed in a global arena [4], How have power generation businesses been behaving, perceiving this trend? They should be aware of this long-term industrial trend, but it would be interesting to see whether they have been actually adjusting its power plant portfolio from \u201ccash generating\u201d fossil fuels power generation to economically less attractive renewable energy.<\/p>\n

Trouble at Mitsubishi \u2013 Japan\u2019s Leading Independent Power Producer<\/u><\/strong><\/p>\n

Mitsubishi Corporation (Mitsubishi) is one of the largest independent power plant developers in Japan. Mitsubishi is a diversified business entity, whose business coverage ranges from natural resources, infrastructure development (including power plant development), commodity trading, to retail business. Mitsubishi\u2019s strategy is secure stable income from low-volatility assets such as power generation, and aim upside from high-volatility natural resources business, making power generation one of the most important strategic business segments [5].<\/p>\n

Although some investors is skeptical about the concept of \u201cdiversification,\u201d the company seems to believe that having stable income enables it to keep a good credit rating, as well as invest in natural resource assets at the bottom of market when competitors are financially constrained.<\/p>\n

Power generation constitutes approximately 20% of its stable income depending on year [6]. Has Mitsubishi been able to adopt itself to the changing trend of fuel type in the world?<\/p>\n

Analyzing its power asset portfolio [6], it is striking that most of its income is from fossil fuel power plants. Does this mean it has been ignorant of this ongoing trend in the world? Or is there any other lesson we can learn from here?<\/p>\n

In fact, Mitsubishi established the division focusing on renewables and transferred more than a hundred\u00a0employees to this division even before Lehman Shock. Also, it partnered with the strongest renewable player in the world, Spain\u2019s ACCIONA, in the early 2009. It has been more than seven years since then. Why is it still stuck with only limited renewables portfolio?<\/p>\n

 <\/p>\n

Solving Dilemma?<\/u><\/strong><\/p>\n

This business case gives us an important lesson.<\/p>\n

Successful companies\u2019 internal control and governance system have optimized themselves to their ongoing successful business (i.e. in this case fossil-fueled power plant). So, using governance criteria for evaluating renewable business opportunity has been automatically filtering potentially competitive renewable assets.<\/p>\n

This is not a problem unique to Mitsubishi. In power generation industry, there is a clear divide between the fossil fuel power players and renewable players. For instance, if you look at the website of TENASKA (American leading power plant developer) [7], you can find many natural gas power plant, but limited number of renewables. On the other hands, ACCIONA (global leading player in renewable) [8] has more than twenty renewable projects in the US, but no fossil fuel project.<\/p>\n

 <\/p>\n

My recommendation to Mitsubishi is as follows:<\/p>\n

1) Curve-out renewable business division<\/strong><\/em><\/p>\n

It will be difficult for the existing, profitable fossil fuel power division to spare resources on renewables which is\u00a0less profitable in a short-term.<\/p>\n

2) Introduce\u00a0different investment evaluation method in curved-out\u00a0company<\/strong><\/em><\/p>\n

Risk-return of renewables is\u00a0different from fossil fuel power plant. So, Mitsubishi\u00a0should create a separate\u00a0methodology to evaluate renewable business opportunity (for instance, assumption of longer investment period).<\/p>\n

3) Acquire renewable energy developer with construction and operation functions<\/strong><\/em><\/p>\n

Considering the leading players (like ACCIONA) in renewable industry are equipped with not only investment function but construction and operation function (meaning they can enjoy income from construction, operation, and investment return), it is important to be on the same page for becoming competitive.<\/p>\n

(Word Count: 798)<\/p>\n

\n

[1] 性视界 Business School Case, N2-317-032 \u201cClimate Change in 2016: Implications for Business\u201d (Exhibit 20) (Oct 14, 2016)<\/p>\n

[2] Under 450 Scenario, data based on “World Energy Outlook 2015”<\/p>\n

[3] American Gas Association, https:\/\/www.aga.org\/environmental-benefits-natural-gas\u00a0(accessed on Nov 4, 2016)<\/p>\n

[4] United Nations Environmental Programme, GEO-5 for Business: Impacts of a Changing Environment on the Corporate Sector<\/p>\n

[5] Mid-term Strategy 2018,\u00a0http:\/\/www.mitsubishicorp.com\/global\/<\/a> (accessed on Nov 1, 2016)<\/p>\n

[6] Annual Reports, \u00a0http:\/\/www.mitsubishicorp.com\/global\/<\/a> (accessed on Nov 1, 2016)<\/p>\n

[7] http:\/\/www.tenaska.com\/<\/a> (accessed on Nov 2, 2016)<\/p>\n

[8] http:\/\/www.acciona.us\/<\/a> (accessed on Nov 2, 2016)<\/p>\n","protected":false},"excerpt":{"rendered":"

Evolving trend of energy sources and challenge in transforming power generation business for an incumbent player<\/p>\n","protected":false},"author":1984,"featured_media":9001,"comment_status":"open","ping_status":"closed","template":"","categories":[1342,1406,741,1405,185],"class_list":["post-9000","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-coal","category-fossil-fuel","category-natural-gas","category-power-plant","category-renewable-energy"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/climate-change-challenge-2016\/","yoast_head":"\nTrouble at Mitsubishi (Transforming Power Plant Business Portfolio) - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/trouble-at-mitsubishi-transforming-power-plant-business-portfolio\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Trouble at Mitsubishi (Transforming Power Plant Business Portfolio) - 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