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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
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)
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter3
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)
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter4
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)
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter6
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter8
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
Copyright 2016 © Professor Michael E. Porter920160428—Iceland Geothermal Conference-Cluster Presentation-FINAL
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter10
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
Copyright 2016 © Professor Michael E. Porter1120160428—Iceland Geothermal Conference-Cluster Presentation-FINAL
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
Copyright 2016 © Professor Michael E. Porter1220160428—Iceland Geothermal Conference-Cluster Presentation-FINAL
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter13
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.
Copyright 2015 © Professor Michael E. Porter1420160428—Iceland Geothermal Conference-Cluster Presentation-FINAL
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter15
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter16
The Global Footprint of Icelandic Geothermal Companies
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter17
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter18
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter19
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter20
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter21
Members of the Iceland Geothermal Cluster Initiative
No Active Members
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter22
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter23
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter24
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter25
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter26
The Global Agenda
• Visibility
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter27
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter28
The Global Agenda• Visibility
• Financing– Financing structures must be better developed, reducing reliance on limited
public sector funding sources
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter29
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter30
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter31
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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter32
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 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
20160428—Iceland Geothermal Conference-Cluster Presentation-FINAL Copyright 2016 © Professor Michael E. Porter33
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