unlocking the potential of geothermal energy: strategic … files/20160428... · 2016-08-11 ·...

This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “Building the Microeconomic Foundations of Competitiveness,” in The GlobalCompetitiveness Report (World Economic Forum), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008), “Clusters and the Great Recession”(Delgado-Porter-Stern, Working Paper 2014), “Defining Clusters of Related Industries” (Delgado-Porter-Stern, NBER 2014), “Clusters, Convergence, and Economic Performance” (Delgado-Porter-Stern, NBER 2012), “Cluster andEntrepreneurship” (Delgado-Porter-Stern, CES 2010), “The Economic Performance of Regions” (Regional Studies 2003), and ongoing related research. No part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter. For further materials, see the website of the Institute for Strategy andCompetitiveness (www.isc.hbs.edu).

Unlocking the Potential of Geothermal Energy:Strategic Implications for Iceland, Other Nations

and the International Community

Professor Michael E. PorterHarvard Business School

Iceland Geothermal Conference Harvard Business School

April 28th, 2016

http://www.isc.hbs.edu/

20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter2

The Potential of Geothermal• Provides clean, sustainable energy

• Geothermal energy operates 24 x 7

• Geothermal energy has unique advantages in heating

• Geothermal energy can be exported via energy intensive products

• Expands energy self-reliance

• Geothermal resources are available in many locations with significant unmet energy needs

• The potential for combining power generation and direct use together creates major economic and societal benefits for local communities and industries (e.g. food production, heating, other energy intensive activities)


0

0.1

0.2

0.3

0.4

0.5

0.6

Relative Cost Position of Clean Energy Sources Levelized Cost of Electricity (LCOE), 2010 and 2014

Source: IRENA (2014)

Weighted Average LCOE Range (2014 USD/kWh)

Fossil Fuel LCOE Range

2014

2010 2010 2010 2010 2010 2010 20102014 2014 2014 2014 2014 2014 2014

Geothermal Biomass Hydropower ConcentratedSolar Power

SolarPhotovoltaic

Wind(Offshore)

Wind(Onshore)


Geothermal Potential Globally

Sources: Islandsbanki, ThinkGeoEnergy, Geothermal Energy Association, IGA, Chevron ThiinkGeoenergy 2013)Note: Installed Capacity of 2010 (2012), resource estimates combined (1999-2012) – IGA estimates a conservative total potential of 70,000 MW and with technology improvements (extended use of low heat and EGS resources) at around 140,000 MW in power generation capacity.

Current installed capacity

Projects & inferred resources

High temperature regions

Resource estimates

Installed Resources

North America

4,344

32,200

6,447

Installed Resources

Cent. America & Caribbean

522 27,400

618

Installed ResourcesEurope

1,6423,400

1,271

Installed ResourcesAfrica

180

11,600

2,249

Installed Resources

South America

1

30,800

730

Installed ResourcesAsia

4,568

70,884

7,868

Installed Resources

Aus., NZ & Pacific

640

7,700

666

Installed ResourcesMiddle East

822,550168

20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter5Source: BP Statistical Review of World Energy June 2015

Growth of Renewable Energy Sources

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

WindCAGR: 48%

SolarCAGR: 23%

GeothermalCAGR: 3%

Cumulative Installed Power Capacity (Megawatts)


The Future of Geothermal

• Geothermal has significant technical and economic advantages relative to other renewable and even traditional sources of energy

• There is up-front risk in exploration and verification of the quality of the available resource

• Public policy support for renewable energy sources has been much stronger in wind and solar, despite their inferior economics

• How do the industry and governments around the world move ahead to capture the economic and social benefits of the resource?

Copyright 2016 © Professor Michael E. Porter720160428—Iceland Geothermal Conference-Cluster Presentation-FINAL

Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden

Restaurants

Attractions andActivities

e.g., theme parks, casinos, sports

Airlines, Cruise Ships

Travel Agents Tour Operators

Hotels

PropertyServices

MaintenanceServices

Government Agenciese.g., Australian Tourism

Commission, Great Barrier Reef Authority

Educational Institutionse.g., James Cook University,

Cairns College of TAFE

Industry Groupse.g., Queensland Tourism

Industry Council

FoodSuppliers

Public Relations & Market Research

Services

Local Retail, Health Care, andOther Services

Souvenirs, Duty Free

Banks,Foreign

Exchange

Local Transportation

What is a Cluster?The Cairns (Australia) Tourism Cluster


Equipment Suppliers(e.g. Oil Field Chemicals,Drilling Rigs, Drill Tools)

SpecializedTechnology

Services(e.g. Drilling Consultants,

Reservoir Services, Laboratory Analysis)

Subcontractors

(e.g. Surveying,Mud Logging,

Maintenance Services)

BusinessServices

(e.g. MIS Services,Technology Licenses,

Risk Management)

Specialized Institutions(e.g. Academic Institutions, Training Centers, Industry Associations)

Oil & Natural Gas Completion &

Production

Oil & Natural GasExploration & Development

OilTrans-

portationOil

TradingOil

Refining

Oil Retail

Marketing

OilWholesaleMarketing

OilDistribution

GasGathering

GasProcessing

GasTrading

GasTransmis-

sion

GasDistribution

GasMarketing

Upstream Downstream

Oilfield Services/Engineering & Contracting Firms

Mapping a ClusterThe Houston Oil and Gas Cluster


Clusters in Developing CountriesCut Flower Cluster in Kenya

Plantstock

Greenhouse; Shading Structures

Irrigation Technology

Pre-CoolingTechnology

Fertilizers, Pesticides, Herbicides

Agricultural Cluster

Horticultural Cluster

Post-Harvest Cooling

Technology

Grading / Packaging Sheds

Packaging & Labeling Materials

Refrigerated Trucks

Freight Forwarders

Clearing and Forwarding Agents

Air Carriers (Commercial /

Charters)

Tourism Cluster

Flower FarmingPost-Harvest

Handling; Transport to Market

Horticultural Agencies, NGOs & Industry Associations

Horticultural Crops Development Authority (HCDA) Government Export Policies Targeting Horticulture

Non-Government Organizations(e.g., The Rural Enterprise Agri-Business Promotion Project)

Trade & Industry Associations(e.g., Kenya Flower Council)

Education, Research & Quality Standards Organizations

Research Institutions(e.g., Kenya Agricultural Research Institute)

Public Universities with Post Graduate Degrees in Horticulture(e.g., University of Nairobi)

Quality & Standards(e.g., EUREGAP Standard, Kenya Plant Health Inspectorate Services)

Sources: MOC student team research by Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, Tijan Watt, Harvard Business School, 2007


Assessing the Cluster Business EnvironmentMassachusetts Life Science

Demand ConditionsFactor (Input)Conditions

Context for Firm Strategy and Rivalry

Related and Supporting Industries

+ Strong base of local companies that compete on innovation using cutting edge science

+ Local companies compete and cooperate intensively

+ High visibility, support and cooperation with government

- Limited manufacturing in the State, especially in pharmaceuticals

+ Sophisticated local medical practitioners- Reimbursement environment does not

foster the adoption of product and process innovations in health care delivery

- High medical malpractice costs in Massachusetts may deter new treatments

- Barriers to performing clinical trials with local institutions

+ Presence of specialized service providers such as law firms and consultants

+ Deep local supplier base in many inputs, instruments, and supplies

+ Strong collaboration institutions

+ Strong K–12 educational system+ Strong science base of leading researchers and

leading academic research centers+ Frequent technology and knowledge transfer from

research to industry+ High availability of risk capital and federal research

funding- Higher cost of doing business than some regions- High cost of living, especially housing- Shortages of mid-level professionals - Technology transfer lagging other important regions


Why Clusters Matter?

• Clusters increase productivity and operational efficiency

• Clusters stimulate and enable innovations

• Clusters facilitate commercialization and new business formation

• Growth and exporting across border is accelerated by cluster development


Source: “Clusters and the Great Recession” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2014), “Clusters, Convergence, and Economic Performance” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2012), “Cluster and Entrepreneurship” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2010); “The Economic Performance of Regions” by Michael E. Porter (2003)

• Presence of strong clusters

• Breadth of industries within a cluster

• Strength in related clusters

• Presence of a region‘s clusters in neighboring regions

• Job growth

• Higher wages

• Higher patenting rates

• Greater new business formation, growth and survival

• Resilience in downturns

• Build on the region’s existing and emerging clusters rather than chase hot fields

• Economic diversification occurs within clusters and across related clusters

Empirical Evidence on Clusters


Clusters as a Tool for Economic Policy

• Cluster upgrading fosters greater and more sophisticated competition rather than distorting the market

• Leverages the power of linkages across companies to drive rapid economic development

• Policies and investments strengthen multiple related firms/institutionssimultaneously

• A forum for collaboration between the private sector, trade associations, government, educational, and research institutions

• Enhances the effectiveness of traditional economic policy areas, such as training, R&D, export promotion, FDI attraction, etc.


Clusters

Specialized Physical Infrastructure

Natural Resource Protection

Science and TechnologyInfrastructure (e.g., centers, university departments, technology transfer)

Education and Workforce Training

Business Attraction

Export Promotion

• Clusters provide a framework for organizing the implementation of many public policies and public investments directed at economic development

Quality and Environmental standards

Market Information and Disclosure

Organize Public Policy Around Clusters


Global Geothermal Electric Capacity (GWe)

Country 2010 2014% of total

Electric Cap

Increase (%)

1 Iceland 0.6 0.7 25.0% 17%

2 Kenya 0.2 0.5 17.0% 150%

3 Philippines 2 1.9 10.6% -5%

4 New Zealand 0.7 1 9.8% 43%

5 Indonesia 1.2 1.4 2.7% 17%

6 Mexico 1 0.8 1.3% -20%

7 Turkey 0.1 0.5 0.9% 400%

8 Italy 0.7 0.8 0.7% 14%

9 USA 2.4 2.6 0.2% 8%

10 Japan 0.5 0.5 0.2% 0%World Total 10 11.5 0.2% 15%

Source: Holm,Alison (May 2010), Bertani, Ruggero (April 2015)

Country 2010 2015 Wt Per Capita

Increase(%)

1 Iceland 1.8 2 6667 42%

2 Sweden 4.5 5.6 566 96%

3 Finland 1 1.6 291 26%

4 Switzerland 1.1 1.7 207 38%

5 United States 8.9 17.4 54 15%

6 Turkey 2.1 2.9 38 74%

7 France 1.3 2.3 36 4%

8 Germany 2.5 2.8 34 12%

9 Japan 2.1 2.2 17 63%

10 China 12.6 17.9 13 57%Total 37.9 56.5 7923 49%

Global Geothermal Direct Use Capacity (GWt)

Iceland’s Role in Geothermal EnergyTop 10 Geothermal Energy Countries


The Global Footprint of Icelandic Geothermal Companies


The Icelandic Geothermal Cluster

Core FunctionsGeothermalResource

Exploration &Development

GeothermalEnergy

ProductionTransmission & Distribution

DrillingGeoScience BusinessConsulting ConstructionFinancing

PipesTurbines

and Generators

OtherEquipment

GeothermalResearch

Training &Education

Legislation Permitting & licensing

Tourism Oil &Gas

Other Energy Production

Government

Service Providers

Equipment SuppliersRelated Clusters

Local Consumers (Direct)

Energy Audit& Law firms

TechnicalConsulting

District Heating

Industrial heating

applications

IndustryRetail Electricity

Recreation, Health & Tourism

EconomicDevelopment

ClusterAssociations

(IGA, IGCI,GEORG, Samorka, Jarðhitafélag)

IndustryNews

Local Consumers (Indirect)

Knowledge

Insurance

Fisheries Agriculture Market Regulation

Operations & Maintenance


Strong Factor ConditionsGeothermal Skill and Research Base in Iceland

• International leader in geothermal energy research

• Six month postgraduate training program aimed to improve the capacity building of developing countries in geothermal exploration and development

• Offers graduate and professional development courses in geothermal studies

Source: Nordic Patent Institute, US PTO


Sophisticated Local DemandIcelandic Geothermal Energy Use by Application, 2013

Source: Natural Energy Authority of Iceland

Electricity Generation

40%

Space Heating43%

Greenhouses2%

Fish Dryingand Farming

5%

Industry2%

Snow Melting4%

Swimming Pools4%

40%Indirect Utilization

• Aluminum Smelters• Data Centers• Seaweed Manufacturers• Liquid Carbon Dioxide• Other Industries

60%Direct

Utilization


Leading Geothermal Companies in IcelandMajor International Players Operating in Iceland

Source: KPMG

Leading Technical Consultants Leading Drilling Companies

SKM Australia

Borealis Geopower Canada

Technip France

Geox Geothermische Energie Germany

EFLA Iceland

Mannvit Iceland

Reykjavik Geothermal Iceland

Verlos Iceland

JFE Engineering Corporation Japan

Global Synergy Link Kenya

Perforadoras Santa Barbara El Salvador

H. Anger’s Sohne Germany

Iceland Drilling Iceland

Constructora y Perforadora Latina Mexico

Industrial Perforadora de Campeche Mexico

MB Century Oman

Filtech Energy Drilling Corp. Philippines

Podzemburgaz Russia

Geothermal Anywhere Slovakia

DHS Drilling UnitedStates


Members of the Iceland Geothermal Cluster Initiative

No Active Members


Development of Iceland Geothermal Cluster

Mapping andAnalyzing 2009-2011

Cluster OrganizationFounded 2013

Cluster CoreEstablished

Innovation andDevelopment

Joining Efforts2011-2012 Forming Strategy 10 Year Action Plan

IGC 2013Business Conference

Consolidation ofInternal Stakeholders

BuildingRelationships

Cluster to Cluster(Nation to Nation)

2009 – 2012 2013 – 2014 2015 2016 & Beyond

Execute Priority action

Mobilize the Cluster

Define aStrategy

DefineAction plan


Recent Activities of the Cluster Initiative

• Worked with the Icelandic government and DG Energy (EU) on energy efficiency and renewable energy topics

• Represented Iceland at COP21 talks on district heating• Initiative to increase geothermal technology patenting in Iceland starting in 2016

Policy Influence

• Signed an agreement with GEODEEP in France to create a framework of standardized model licenses for exploring and developing geothermal energy resources

Export Promotion

• Executive seminars for foreign business executives• Start-up Energy business accelerator

Skills & Company

Development

• Promoting the concept of resource parks domestically (Northeast of Iceland) and abroad (Nicaragua)

• Cooperating with the tourism cluster initiative

Network and Partnerships


Action Agenda for the Iceland Geothermal Cluster• Fully engage government and research institutions in the cluster effort

• Connect research priorities in academic institutions with the needs of companies in the cluster

• Put stronger focus on patents as way to capture economic value of research findings

• Encourage direct collaboration between companies and research institutions

• Step up direct collaboration between companies

• Move beyond exporting discrete services to full solutions

• Enhance collaboration between companies in approaching foreign markets

• Package Iceland projects for replication internationally

• Develop financing mechanisms for geothermal projects abroad, including strong relationships with international development institution

• Create an overall strategy for marketing the geothermal opportunity globally


Global Emerging Geothermal Clusters

Source: Holm,Alison (May 2010), Bertani, Ruggero (April 2015)

Geothermal electric capacity – 2010 (GWe)

High temperature regions

Geothermal electric capacity – 2014 (GWe)

2010 2014

Iceland

0.70.6

17%

2010 2014

USA

2.42.6

8%

2010 2014

Turkey

400%0.1

0.5

2010 2014

Kenya

150%0.2

0.5

2010 2014

Indonesia

17%

1.21.4

2010 2014

New Zealand

43%0.7

1


The Global Agenda

• Visibility


Policy Support by Energy SourceEuropean Union, 2012

Total support provided in the 28 Member States (in billion €2012), including EU level support

0 2 4 6 8 10 12 14

Geothermal

Other Renewables

Wind offshore

Hydro

Natural gas

Nuclear

Biomass

Coal

Wind onshore

Solar

Source: Subsidies and Costs of EU, Ecofys 2014 by order of: European Commission

Renewables

Fossil Fuels

Other Geothermal


The Global Agenda• Visibility

• Financing– Financing structures must be better developed, reducing reliance on limited

public sector funding sources





• Direct utilization– Systematic integration of direct use to enhance project economics– New kinds of government and private sector participants


Benefits of Direct Utilization• Cascading use of geothermal energy, combining power generation with direct

utilization, provides increased efficiency and improved economics– Only 10% net efficiency is achieved when generating electricity alone– Waste heat from the electricity generation process can be recovered for direct use

• Adding a secondary use, such as a greenhouse to a small ($1m/year) geothermal plant can decrease payback period from 6 years to 2 years

• However, cascading use requires significant coordination among actors


Direct Utilization in Indonesia

• In West Java, Indonesia, the local government has passed legislation mandating the simultaneous development of direct use, along with electricity generation and defined a direct-use development roadmap

• One project adapted a geothermal electricity generation plant to support mushroom cultivation, enabling growth of the local agriculture

• The program expanded the mushroom growing capacity to 25,000 bag-logs per month





• Direct utilization– Systematic integration of direct use to enhance project economics– New kinds of government private sector participants

• Industry standards

• Cluster development– Fragmented groups of small companies must organize in cluster efforts to

be able to offer integrated solutions and effectively engage government


Cluster Collaboration Across Countries

Veiling Holambra, Brazil

Landgard, GermanyFloraHolland Auction, The Netherlands

Taipei Flowers Auction, Taiwan

Ota Floriculture Auction, Japan

Ontario Flower Growers Co-operative, Canada

FloraMax Flower Auctions, New Zealand

Florabella, Italy Kunming Flora Auction, China

World Export Leader, Cut FlowersInternational Flower AuctionInternational Logistics Hub

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