Entrepreneurship in the Middle East energy sector


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A nation’s transition from one technological path to another is the underlying feature to understanding the transformation to an innovation-led system. The process of change and factors that favour the adoption of certain types of technologies over others enables to examine the role of different innovation mechanisms and actors that drive an economic and industrial transformation.

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Entrepreneurship in the Middle East energy sector

  1. 1. Entrepreneurship and Path Creation inthe Saudi Arabian Energy TransitionBy Tatjana de KerrosPosted on April 9, 2012 on The Entrepreneurialist A nation’s transition fromone technological path to another is the underlying feature to understanding thetransformation to an innovation-led system. The process of change and factors thatfavour the adoption of certain types of technologies over others enables to examine therole of different innovation mechanisms and actors that drive an economic andindustrial transformation.Within the last two years, three combined challenges have emerged in the Kingdom ofSaudi Arabia; sustainability, competitiveness and energy security. These challenges arecoupled with other pressing macro-economic issues such as job creation, workforcenationalization and diversification of the economic structure. In the coming years, thesefactors will be drivers of the third energy revolution in Saudi Arabia.The first energy revolution started in 1938, with the discovery of oil fields in AlHasa and the formation of the most powerful oil company in the world, Saudi Aramco.The second energy revolution in 1973, led by the OPEC crisis and the oil embargo, sawthe price of the barrel double and led to one of the fastest economic and infrastructuraltransformations ever seen globally. Saudi Arabia transformed from oil exporter to oneof the most powerful and affluent nations in the world, having a widespread effect on itsorganizational and industrial evolution, whose impact remains visible to this day. Thethird energy revolution is shaping, its backbone remaining Saudi Arabia’s vast natural
  2. 2. resource wealth, but this time, sustainable resources are the central feature of thistransition.In 2011, Saudi Arabia saw a US$ 40.3 billion loss in oil revenues due to domesticelectricity consumption, which is encountering a 5% growth annually, and has risen by27% in the last four years alone. Oil revenue losses are expected to rise to US$ 54.9billion by 2015, equivalent to one third of Saudi Arabia’s 2012 national budget and 18times the expected government surplus. According to the Electricity and Co-GenerationRegulatory Authority (ECRA), the number of new electricity consumers rose by 57.4%from the period 2000-2009, 52% of which is compromised by residential growthalone[1]. By 2016, the number of customers connected to the power grid is expected togrow by 116%, and the impetus given by the Saudi government to increase privatesector actors has seen an increase of 93.7% in sold energy by the SEC to thecommercial sector[2].However, Saudi Arabia is far from blind from these issues. Rather, the unfolding of itsdomestic energy security has given rise to the opportunity to invest in new technologicalpaths that will transform an energy crisis into an energy revolution. Approximately US$100 billion has been set aside to invest in alternative energy sources, which will see thelarge-scale deployment of nuclear and solar power, aimed to compromise up to 15% ofthe total energy mix by 2020[3]. The return on investment of alternative energies is alsosignificant- a US$ 1 billion investment in solar energy could lead to a revenue potentialof $2 billion by 2013, equivalent to a 72% return[4].This leads us to explore who will be the drivers and actors of this new technologicalpath, which could lead Saudi Arabia to become the global hub for alternative energyproduction and exports. How will Saudi Arabia be able to balance the integrationof alternative energy to its energy mix without disrupting other sources ofcompetiveness? The Kingdom is engaging into a process of economicirreversibility which will lay the foundations for all future resource allocation; not justby government institutions, but by the set of actors that are incremental to achievingthese goals and form part of the current system of equilibrium. Intentions can only betransformed into a reality if Saudi Arabia manages to break its technological ‘lock-in’ toenable the launch and adaptation of a renewable energy path away from oil dependence.And at the very heart of the creation of a new technological trajectory, laysentrepreneurship.Oil dependency, technological ‘lock-in’ and path dependence in Saudi ArabiaTo understand how entrepreneurship can reconfigure Saudi Arabia’s energy system,understanding the mechanisms that has led to the dominance of a particulartechnology- in this case hydrocarbons- over a sustainable energy source, such as solarenergy, is crucial. To this effect, evolutionary economics and path dependence plays ahuge part in explaining why the transition to alternative energy is only being pursuednow, rather than in the late 1970’s, as would initially have been possible. This alsoenables to project the role of entrepreneurship in the development of new energysystems, and subsequently, develop inducing regulations for all actors involved.Path dependence implies that the evolution of an industry is governed by theconsequence of past events and decisions that create self-reinforcing mechanisms and
  3. 3. positive feedback loops enabling a predictable outcome for prices and market shares.From an economic standpoint, it has been argued that technological path dependencestems from a minor or inconsequential event that provides the impetus for a technology,product or standard to lead, having irreversible influences on the market allocation ofresources[5]. In its most negative connotation, it means a system, once having adopted adominant path, finds itself unable to ‘shake free’ of this technology on the premise thatit will destabilize the whole of the system’s equilibrium.Path dependence is a concept that also easily applies to regional disparities in economicdevelopment, as economic landscapes inherit the legacies of pat developments whichcan influence its future development. Regions become ‘locked in’ to particulareconomic specialization, becoming over reliant on a particular technological resource,leading to rigid and inflexible structures and restricting its ability to adapt tocompetitive forces. Regions that suffer from path dependence become more vulnerableto external shocks, which in turn, can bring about the decline of an industry as whole[6].We can argue that at one stage, a state of multiple equilibrium existed in Saudi Arabia,where both oil and solar power had the opportunity to compete successfully, butinvesting resources in oil was favoured beyond investing in the stock of alternativeenergy. A mechanism of selection took place where actors ‘branched out’ and decidedto extend the chosen path.Oil already detained a selectional advantage as it was more technologically advanced,detained wide-spread user experience, and brought about ‘increasing returns’ for actorsinvolved. This meant that although oil-based energy industries had an inferior long-runpotential, the actors involved in the industry had gained an early lead, gained experienceon how to increase production and reduced costs, directly raising the benefits for thewider market. Added to this were the large fixed and sunk costs associated with oilextraction and production, as compared to the cost of non-modular technologies, whosecosts tend to decrease at much slower rate that wind or photovoltaic modules[7].Among other investment assets that cannot be ignored include the reputationof individuals, firms and organizations, as well as heavy investments into the creationof knowledge assets through education and training. At the time, the credibility,feasibility and commitment to enabling policy was not substantial enough for theseactors to engage in competitive behaviour. This was aggravated by the government’stendency to detain large stakes in energy actors, and to partake in the practice ofselecting ‘winners and losers’, hence creating an artificial competitive environment.From research in the field of path dependence, it has emerged that there exist variousdegrees of this type of system behaviour. Path dependence at its most engrained is basedon decisions to use a particular system (or technology) that may have a controllinginfluence for decades, and by which the long-term effects are fully appreciated bydecision-makers. All other actors become ‘locked-in’ to this technology despite itsinferiority due to its profit-making abilities, or in the case of Saudi Arabia, revenuewhich contributes to 47.6% of GDP[8].From an organizational perspective however, decisions to prolong the usage of oil ratherthan develop alternative energy technologies resides primarily in asymmetric orimperfect information. Without a clear market outlook and the ability to project thereturn potential and demand, the associated risks are deemed too excessive by
  4. 4. incumbent firms and investors. In addition, the failure to deploy past alternative energyprojects such as SOLERAS resulted in the widespread belief that the initial conditionsand selection of an alternative path didn’t lead to the anticipated outcome. ‘Failure tolaunch’ tends to include what is coined as ‘technologies of unknown merit’. Economicmomentum is lost as either the market place for such technologies do not yet exist,affected parties are not yet born and actors cannot successfully coordinate or pool theirresources. Past events demonstrate that these factors heavily influenced the slow uptakeof alternative energy in Saudi Arabia, with key energy incumbents preferring to balancebetween meeting external pressures whilst conforming to their undeniable competitiveadvantage in hydrocarbons and sunk costs in infrastructure.Above any other technological field, path dependence in energy systems is concernednot only with technology, but the ideas and practices that are imbedded within theorganizational behaviour of actors, and consumer demand and behaviour by end-users.Ideas and practices in the energy field subsequently shape innovation capabilities,government policy, the environment and competition- all of whom are interlinkedwithin the reigning energy paradigm. Experience acquired with the usage ofhydrocarbons as the primary energy source generates knowledge derived fromexperience. As technological knowledge is gained, this creates coordination effects;whereas the benefits derived by one user increases when others use it. This creates adomino effect, simultaneously increasing the positive expectations of its benefits by allactors within the system, and generating increasing returns in the form of profit,sustaining the ‘technological lock-in’ and influencing macro-level inputs and micro-level behaviour.The end of industry, innovation and creative destruction When examining the impacts of path dependence,policy-makers and practitioners often neglect how closely related it is to industrylifecycles, therefore how easily it can be disrupted. As path dependence is linked to theevolution of an industry, it will follow the same industrial lifecycle of formation,development, maturity and eventually, discontinuity.At the formative stage, a breakthrough discovery will enable firms to enter a newindustry, with those that are successful able to expand their production and generateeconomies of scale, leading to the exit of firms that are not able to compete. As theindustry develops, firms compete with alternative products, technologies and designs,whereas by the rules of the industry, one technology will have dominance above allothers. This creates ‘lock-in’ as new products become uncompetitive and innovation
  5. 5. occurs only in processes, aggravating barriers to entry. When industry maturity has beenreached, new entrants are unable to compete with incumbents, and can only operatewithin niche markets which do not allow for economies of scope.However, incumbents cannot dominate niche markets, making it the ideal ecosystem fornew entrants to gain resilience and sustainability. Niche environments such asspecialized clusters, preferential policy or even incubators create a ‘protected’ spacewhereas collaboration, rather than competition with incumbents is favoured, andenables new entrants to differentiate their products from the dominant path. Thesespaces allow for innovative activity, experimentation and growth, building on theexisting resource base and competencies of large firms. In this niche, technologies candevelop and mature whilst remaining sheltered from market forces.However, a dominant energy system cannot be rendered discontinuous without thetechnologies developed in niche markets being commercialized and diffused. Thisrequires the mobilization of skills and resources, as well as the transfer of knowledge.Schumpeter clearly distinguishes the difference between an invention and aninnovation; an invention being a product or process conceived for the first time, asopposed to an innovation which is the commercialization of that invention, involving atransition from what is technologically possible to what is economically viable[9]. Onlyonce a critical mass of innovations have occurred within a protected niche it is thenpossible to commercialize them via new investors, entrepreneurs, policy-makers,incumbents and ultimately, the end-users.To achieve this process, supporting new ventures and entrepreneurial activity is critical.It is a well-known fact that entrepreneurial firms are more likely to adopt disruptiveinnovation. Entrepreneurs seek solutions to problems that cannot be solved by oldtechnologies, and without radical innovation within the energy space, the dominantmarket for fossil fuels cannot be destabilized.Entrepreneurs have two strategic options: create new ventures based on incrementalinnovation- thus prolonging the dominant path, or pursuing innovations that aims tobreak the mould and create a new technological path. This differs from incumbents whoare more likely to invest in R&D based on technologies that balance between emergingexternal pressures but retain their competitive advantage. However, these types of R&Dinvestments only contribute to creating discontinuous improvements in the dominanttechnology. If an alternative technology manages to break the mould, the old system onwhich the firms are dependent becomes obsolete, as will eventually be the incumbent.Other forces such as organizational inertia, hierarchical rigidity and risk aversion areadditional features which destabilize incumbent firms and create a loss of vitality andpower to develop.Nowhere is the battle between old and new more pronounced than in the energy field, asit is the means of production that changes, not the end-product. A new system will notemerge on the side-lines, but amidst the old structure. It will build on the existingcompetency base and recombine existing resources with new players. To this effect, it isimportant to realize that no single energy technology will be the ‘be-end and end-all’,but that several technologies shall have to compete in parallel. During this stage ofdiscontinuity, one or more firms may have a competitive advantage or superior position,but this will only be temporary. It will take a mass scale of innovations within the sector
  6. 6. and inducing policy to generate the momentum to transition from one technology toanother.Goodbye the ‘Heroic Entrepreneur’As was argued above, new entrants are incremental to the process of creativedestruction that garners change and unproductive economic growth. As has been thecase in many economies which today have radically shifted their energy systems toalternative energy, entrepreneurship was one of the root enablers to this transition.Entrepreneurs are known as ‘path creators’. They set in motion the process that shapeemerging social practices and technologies, and deviate from existing structures.Entrepreneurs understand the factors that have create path dependency, and choose todeviate from its structure. This means entrepreneurs do not conceive new technologiesas neutral, but mindfully know they are socially embedded. They understand that togenerate increasing returns and profit, they must not only create new solutions toexisting problems but new contexts in which the solutions can survive[10].However, the concept that a single entrepreneur can change a technological path isincoherent. To deviate from the existing path necessitates collective action, momentumand a combination of inputs that harnesses the gradual involvement of all actors whoform part of the old system. It requires the ability to mobilize resources, networks andknow-how. The technology has to eliminate boundaries among actors so that it makeseconomic sense and generates positive expectations that reduce uncertainty andeliminate information asymmetries attributed to ‘technologies of unknown merit’.The central challenge found in all entrepreneurial pursuits’ remains access to resources,legitimacy and knowledge asymmetries. Whilst new entrants may be the proponents ofdisruptive innovation, and are incremental at the early stages of market formation, newcontexts for these innovations cannot be created without the support of incumbentsfirms, policy and finally, consumers. The role of networks and institutions cannot be setaside when seeking to create emerging social practices, as entrepreneurs are least likelyto influence policy processes. In the case the change is actively sought due to theinedibility of the future exhaustion of raw materials, the role of the state becomesemphasized as market mechanisms are less effective to support energyentrepreneurship. Upon this realization, the actions of large incumbent firms and actionstaken by the state represents change that is managed, centralized and coordinated.Whilst centralized government and quasi-monopolistic market structures are usuallyassociated with a reduction of entrepreneurial activity, such is not the case in thecreation of new energy systems. Rather, this type of structure can facilitate new marketentrants by having the advantage of being able to pool and manages resources anddecision-making structures. They can clarify the nature of the value chain, and reduceuncertainties on whether entrepreneurs can ‘fill the gap’ by combining their efforts withlarge incumbents. In addition, many of the skills required within alternativetechnologies are closely aligned with those existing in oil & gas, enabling theknowledge-transfer required and increasing experience with a new technology. To thisextent, entrepreneurship is not a “random act of genius, but a disciplined effort ofmany[11]”. Technological developments and the adoption of new energy systems may
  7. 7. be initiated by a limited number of actors, but needs to be backed by a social movementto garner the required momentum.Policy-induced energy innovationEnergy entrepreneurship finds itself at the intersection of science, technology andinnovation. Increasing the scope of innovative activity within energy systems andcreating an enabling environment demands a careful balance between supply-push anddemand-pull mechanisms. In the past and as many international examples havedemonstrated, technology-push policies in the form of public R&D, tax levies andsupport to basic science have been the preferred regulatory instruments to induceinnovation within new energy technologies. However, it has been well documented abalance between demand-pull regulations is the most favourable option. In turn, policiesthat affect that the system distribution of new entrants and incumbents will impact notonly the energy system, but the innovation ecosystem as a whole, as this remainsembedded in a variety of socio-economic contexts.Institutional players are critical in generating and steering various types of learning.Their role should focus on steering the technological development process anddeveloping the complimentary assets necessary to create new paths. Energy systems areunique in the sense that they require institutional intervention for a new path to emerge,and cannot rely upon market forces alone to transition. A ‘level playing field’ has to becreated, which from its on-start must include the creation of niche environments, as wellas shared spaces among players. This can only be achieved through the implementationof multiple policy instruments that encourages the participation of new entrants andcreates favourable market conditions. Institutional players must realize that new energytechnologies cannot compete on equal terms with the dominant energy path, and thismust be translated into policy.Learning and coordination effects have been identified as prime elements of pathdependence- policies that focus on these features can steer new paths. This includessupporting the creation of inter-industry alliances and creating shared industrystandards. In addition, policies that foster the availability of financing and generatesnetworks within education, institutions and associations induces the social movementsnecessary to garner technological momentum.Rather than banking on steering policies to induce breakthrough innovations, at thestage of market formation and development, institutional players should favourbricolage. Bricolage is an approach that harnesses the co-evolution of an industry sectorthrough a series of inputs from all actors, aiming to make smaller but steady gains witha particular technology- hence mutually shaping a new technological trajectory. It is atthe opposite scale of actors attempting to achieve quick and dramatic changes within thesystem, running into the risk of reducing learning and coordination effects. Mostimportantly, if the attempt to achieve a dramatic technological transition fails, itbecomes much more difficult for firms to recover or correct deficiencies[12].Bricolage induces experimentation, particularly among new entrants, and enables tobuild the competency structures, networks and knowledge-sharing which are critical toentrepreneurs and spillovers.
  8. 8. Factors that enable the rapid creation of new energy paths among institutional playersinclude a long-term alternative energy adoption plan, and broad political consensus.Signalling years in advance the future requirements and objectives provides an incentivefor private sector participation, as well as the creation of a future market-space. Ifincumbents and new entrants believe that a market will exist for their products, they aremore likely to invest resources, enhance their competencies and experiment ininnovative activity. Understanding how the future market will be shaped enablesentrepreneurs to secure key assets and assess how collaboration with incumbents willaffect them.Institutional players must realize that policy-induced mechanisms for path creationtypically favour large incumbents rather than new entrants. Large firms detain thelegitimacy, know-how, resources and competencies to influence the shaping, or failureof a market. Strong incentives have to be developed to garner their commitment,investment and collaboration with new entrants in order to transfer resources andknowledge. Critically, during the transition from one technological path to another, theobjective is to ensure the survival of large incumbents alongside new entrants.Lastly, the role of civil society cannot be ignored when shaping the transition. It islead users and active consumers who create the new market for companies, andinfluence the political climate. As the end-product will remain the same, consumers willbe influenced by price rather than by product. Therefore policies which enablecompetitive pricing alongside fossil fuels are indispensable. To harness learning effects,a large-scale demonstration provides experience to the user, having a domino effect thatwill lead to the belief that the use of the technology will increase with every new userand augment its benefits. Again, building networks, education, incentives and providingregulatory plans well in advance increases the build-up of momentum which enableswidespread adoption.Whilst new entrants set in motion the processes of change and new path creation, thepossibility of failure remains very much inherent. Rather than compete, entrepreneurialfirms should seek to collaborate with incumbents to secure legitimacy, increasecapacity, access complimentary assets and facilitate the selective development of newmarkets. The ability to orchestrate efforts with all players within the system enables toovercome the challenges that are associated to current path dependence. There needs tobe a concerted effort for entrepreneurs to understand the current and future market inwhich they are born, and not limit themselves solely on their growth and technology. Tothis end, an understanding of the nature and structure of the value-chain, their intendedpositioning and stakeholder networks are key.As being possessors of knowledge that can deviate from the dominating path,entrepreneurs are required to be able to translate their ideas into an interaction. Themanner in which the entrepreneurial venture is communicated and presented enables totest the preferences of actors within the system, and co-mutually shape them throughexperimentation. This creates the positive feedback loops that set a path in motion.Through practice, new entrants can re-combine existing and under-utilized resources totheir advantage, and partake in the creation of a context for their innovation.The deviation from an existing energy system to a new path involves a multiplicityof players and their careful orchestration. First and foremost, recognizing the
  9. 9. characteristics that signal the destabilization of the dominant system is crucial in orderto enact alternative solutions that enable diversification. To this process,entrepreneurship is focal as they are able to develop a process of mindful deviation thatgenerates collective action in coordination with all actors that form part of the system.They are not exogenous to the system, but have to set new foundations within the oldstructure that can break the technological ‘lock-in’.In the case of Saudi Arabia, the transition is already well underway. Incumbents andchampions are aware of the future transition, and have started allocating their resourcesand enhancing their competencies to ensure that this equates to increased marketopportunity, rather than failure. The centralized nature of resources is enablingleadership and swift decision-making from institutional players, steering the investmentof resources from incumbents.It could be argued that within the current climate, an environment for bricolage ratherthan breakthrough innovation will result in a better coordinated and competitiveenvironment for alternative technologies. Solar technology for example has been at thecentre of R&D in the Kingdom for the past three decades- breakthrough innovations arenot as much required as the collective development of incremental innovations for itswidespread growth, price-competitiveness and diffusion.Despite the huge market potential, the crucial gap remains the inclusion of new entrantsand entrepreneurs to the equation. For Saudi Arabia to manoeuvre its energy transition,a level playing field for entrepreneurial activity within the energy system must beprioritized above all.© Tatjana de Kerros 2012[1] Electricity & Cogeneration Regulatory Authority. (2009). Activities andAchievements of the Authority. Riyadh: Activities and Achievements of the Authority.[2] Saudi Electricity Company. (2010). Annual Report 2010. Riyadh: Saudi ElectricityCompany.[3] King Abdullah City for Atomic and Renewable Energy. (2011). Towards aSustainable Energy Mix for Saudi Arabia. Third Saudi Solar Energy Forum (pp. 1-41).Riyadh: King Abdullah City for Atomic and Renewable Energy[4] Lovato, W. (2011). Six Solar Market Myths: An Investor Perspective. Third SaudiSolar Energy Forum (pp. 1-28). Riyadh: King Abdullah City for Atomic and RenewableEnergy.[5] Liebowitz, (1995). Path Dependence, Lock-in and History p.1[6] (Martin & Sunley, 2006)[7] (Lovio, Mickwitz, & Heiskanen, 2011, p. 277)[8] 2010, Saudi Arabian Monetary Agency.
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