Tag Archives: business

Market for green premium II

Airlines are in the business of transporting people around. Or maybe it’s about curating and creating the best experience in air travel? Or about building a brand? Or is it about bringing people to places and catalysing activities, businesses for locations that would otherwise be overlooked by travellers? Seen that way, the fuel cost of an airline would always be considered a cost. Therefore, to keep cost low, or deliver the greatest profits, the airline will see their fuel as a commodity.

What if the choice of fuel they use starts impacting the customer segments they are targeting or they can serve? What if using sustainable aviation fuel allows them to attract more premium customers? What if they could sell their air tickets at a higher price when they are demonstrably emitting less carbon dioxide? And what if doing so also help them comply with some ICAO requirements?

The market for green premium turns various cost parameters in businesses into a tool for something else. There’s an opportunity to use these new parameters to disrupt the business. Years ago, the low-cost carrier disrupted some of the most traditional airline businesses. Would a low-carbon carrier do the same? What other elements of the whole airline business can be refashioned to fit the whole sustainable, low-carbon identity?

Market for green premium

The energy transition and decentralisation of energy had quietly started shifting the capital markets since close to a decade ago. While the traditional energy players continue to compare the cost of green energy against the cost of their own fossil fuel based energy, they found no reason to diversify their business. Even in face of some subsidy, or some Feed-in-Tariffs, they were reluctant to invest.

There was no scale, and they thought they were going to face more competition and erosion of any green premiums they could secure. But then the capital holders started taking notice. The projects were simple enough to invest into. Solar farms had minimal requirements from an operational perspective, and represented to some degree a pure capital good where almost all the cost are paid upfront for a stream of revenue in long term.

From a risk perspective, it was safe. And so long-term funds which needed safe investments at moderate yields started piling in. The utility scale projects expanded, driving down the cost of equipment, and fostered more innovation there. Here is a case where, the technical simplicity of the operations enabled investors to bypass the typical operating businesses to get into the underlying projects themselves. All of a sudden, it is not about looking for the premium anymore. Because you’re alright with scale.

Sometimes, growing and developing a market is about finding customers who are willing to pay a higher price; but other times, it is about finding investors who are willing to accept a lower expected return for other attributes.

Healthy competition and values

I was put in a system where we were regularly assessed relative to our cohort, made to feel anxious about our position amongst our peers, and put in an artificial environment where we were taught to improve through ‘healthy competition’.

The society’s definition of healthy competition does get out of hand. Guardian recently ran a piece commenting on the number of ‘Forbes 30 Under 30’ featured people who landed in jail or at least trouble with the law.

It’s not just that competition gets out of hand but a question of what kind of values we are sending young people into the society with. Beyond the glamorization of the ideas around hustling and ‘faking it till you make it‘, there is clearly a lack of clear direction on the moral boundaries that should govern the claims made by companies to get ahead in terms of creating investor interest, or customer demand. Is it not time we draw a line, and re-align definition of success with actual activities that will move society and the world forward?

Going back to objectives II

What happens when people at the ‘grassroots’ level of a system tries to solve a system problem, or deal with the symptoms and consequences of a systemic issue? How often have we asked this question and consider how pervasive such a problem archetype is in our modern society?

Corporate change and transformation department should be framing questions this way to uncover projects they can work on. Far too often, there are departments operating at ‘corporate’ or ‘strategic’ level of the company just trying to find easy-wins lurking around the organisation to create some kind of change project. The small projects that affect one or two stakeholders can be better dealt with by themselves. Collecting problem statements on the ground may not be the best because ‘the ground’ tend to contextualise problems within their own scope of work or scope of influence. When they do point out something that is more systemic, it is overwhelming or that they point to merely a symptom of underlying problems.

The corporate strategy department needs to hunt down problem statements by considering first what is the objectives that the company is trying to achieve overall, and what are some of the internal elements of the company that is hindering it from achieving its objectives. That would be more useful corporate change. Solving problems that prevent what existing department perceives as hindrance from them doing ‘their work’ may not always be optimal because ‘their work’ can be a function of the existing silos of an organisation and not exactly meeting the overall objectives of it.

Institution economics

I spent some time during my masters studying institutions and the economic effects that institutions have. By institutions, I mean established ‘laws and practices’ as much as governing rules, systems in place that organises economic activities. These rules and practices have huge impacts on economic development.

Acemoglu et al (2001) was a famous study on the long-lasting effects of institutions and on the economy. I thought it was interesting to take a bit more of a meta view on these topics and discover the forces that sometimes lurks in the background in ways we don’t realise.

Our state of the markets and the economy needs to be thought through the lenses of the institutions we have evolved, the incentives around them rather than just short-term fire-fighting. The shortest route to the near-term outcomes we want does not ensure the outcomes persist. And because these days we tend to think that we can monitor and dynamically ‘guide’ things to a desired outcome, the more we create unnecessary build-up of tensions as we choose to ignore the impact of current institutional structures we have laid down. These we must not ignore.

Calmness in a storm

So everyone in Singapore were talking about Shou, the CEO of Tiktok who went to face the interrogation by the congress. He is a Singaporean and we were all pretty proud of his performance.

That clearly wasn’t easy; he was being talked over, treated rudely; most of the people interrogating him had speeches of their own where they needed him to fill in the blanks rather than genuinely expecting answers. I thought Adrian Tan’s observation that Shou was often the calmest person in the room of people who were interrogating him was interesting.

While the hearing remains inconclusive, there was little mistake that the US is entering yet another cycle of active state intervention into business. It is strange that issues being put across the table confused data privacy issues, responsibilities of a tech company management, geopolitics and business ownership.

Our institutions today are highly complex and sophisticated. Even the concept of ownership in a business is made so complicated by unbundling of the various rights that are traditionally attributed to owners, then dishing them out to various parties.

Supply side perspectives

There was a time when demand and pricing was what matters because the rise of logistics and transport technologies made it easy to ship things around or even store things for long. So production becomes so isolated from consumption that as long as you can price things right on demand side, you can be producing anything anywhere.

Profit then is just about finding lower cost locations, resources, manpower, materials and so on. Services gradually have those attributes as they are increasingly performed remotely. But when we start considering supply chains of products, issues of resilience as well as carbon emissions, things goes a bit tricky.

The future low carbon world might be one where supply chains are shorter, where consuming local looms large and where decentralisation returns. Powering decentralisation is simply the recognition that there’s both financial economy and carbon economy; that when we need to economise on carbon, we can afford it.

Value of a dollar from carbon business

The market values goods and services. And it also values the revenues generated from them. That’s what the capital markets are doing. What is interesting is that the capital markets have its own taste and preferences despite what we consider about rationality of businesses.

A dollar of revenues from unpopular industries can be treated as less than one from the ordinary industries. Just as the dollar of revenues from more popular industries can be seen as being more valuable.

At the moment, climate related businesses gets their chance in the limelight. And in the same vein, the coal businesses were being battered. Yet one can still consider all that rational considering the regulatory risks and issues around availability of feedstock to continue operating.

So is the value of a dollar from different businesses the same? Ultimately it is a question of what you think is the purpose of a business: to make money or to serve the customers.

Demand reductions

We perform a lot of demand forecasting for energy players and increasingly we need to forecast energy or fuel use for other industries. Often the players are thinking about greening their production, supply chain, etc. so we are forecasting how much fuel will be needed, or fleets of ship, volume of goods, amount of energy consumed.

In the climate transitioned world, we envision a greener version of our world when actually, it’ll be a different world altogether. It will not be the same as the one we are in today. For example, the energy content of hydrogen or green ammonia is a fraction of what we currently use as maritime fuel. If long-haul vessels are to switch fuel, they need more frequent refueling and bunkering activities will no longer be as concentrated as today. What will happen to Singapore as a bunkering hub?

Likewise, if companies are starting to be concerned about Scope 3 emissions, are we sure they would just pay more for green logistics? Won’t they procure more of their supplies locally? If we care about sustainability, will we not change our supply chains to switch out carbon-intensive materials.

The metrics around overall goods demand and where they come from will change fundamentally in a climate-transitioned world. ESG or climate is not just compliance, regulatory risk and reporting.

Picking problems II

I wrote about how people can’t solve problems that they are not willing to have. Yet one has to master the art of picking the right problems to work on as well. There had been times in my life when I wasn’t sure which problem to pick on dealing with and my attention became so diffused I wasn’t actually solving any problems but simply touching and going.

A lot of that life was during my previous career. We were often under a lot of pressure to do many things and deal with lots of problems with limited resources. And the result was the need to frequently and quickly get through a problem, declare it solved, and then go on to another one. There were long term issues, and shorter term ones. And one must learn to be able to prioritise them, as well as to properly trade-off resources across the long and short term challenges.

That prioritisation eventually becomes another challenge in itself. And this sort of self-referencing issue keeps popping up over my professional life. I discovered the importance of setting up buffer time for planning, to set aside budget for solutions to manage budgets and to ensure sufficient rest to be able to actually be producing more. Often times, we don’t recognise that the problems we pick naturally lend themselves to some peripheral problems that we need to deal with. That problems actually comes in a package when we are picking them.