Cash flow analysis/ ROI

Kassy Walklett

Wilmington University

September 22, 2021

Germany Renewable Energy Industry: Porter's Five Forces Analysis

Introduction

The world faces enormous energy resources due to the rapidly increasing population, implying that there is an urgent need to devise means that will ensure a stable and sustainable energy system is developed to account for the growth and subsequent shortages. The introduction of renewable energy sources promises the future and the ability to address the highlighted limitation being experienced worldwide (Blazejczak et al., 2014). Germany, one of the best economies in Europe, futures a plethora of renewable energy resources that are environmentally friendly and reusable. Nonetheless, most of its sources are notably under-utilized, especially solar, nuclear, and wind power. The country's government comprehends the significance of and potential that the sector boosts and realizes sustainable energy resources nationally (Bechberger & Reiche, 2004). As a result, the government launched a renewable energy program and green technology policy in encouraging the citizens to incorporate sources that emit low carbon and minimize the overall dependence on fossil fuels.

Nevertheless, there are significant factors that impact the energy sector in the country and consequently the requirements for entry by firms. The factors can be assessed through Porter Five Forces, which include the threat of entry, threat of substitutes, bargaining power of consumers and suppliers, and ultimately, industrial rivalry. The factors are essential for a firm entering a specific industry as they aid in developing effective marketing, competitive strategies, and the feasibility of the business in the long run. As such, the investors will incorporate the five forces in analyzing the energy sector in Germany.

Industry rivalry

As aforementioned, Germany's political position and geographical location allow the country to lead and manage the European market due to its diverse internal economy. It features a petite, medium, and large corporations making the economy exceedingly competitive. According to Porter (1998), rivalry among existing competitors has a significant impact on the overall functioning of the sector. Whenever the rivalry is present among the competitors in a certain sector, the results are low prices yielding low profitability levels for the organizations in the industry. The renewable energy sector in Germany is a highly competitive industry implying that the competition takes a toll on the overall profitability of the organizations in the long term.

Germany’s top renewable energy organizations include Siemen energy, which is responsible for most of the electricity generations especially in other parts of the world; Solstice, a data-driven organization based on power plants; Crop-Energies, which is a member of Sudzucker group; and ABO Wind responsible for renewable energy innovations projects, among others. Each of the highlighted organizations specializes in one of the renewable energy sources except ABO, which specializes in wind, solar, and biomass (Wehrmann, 2020). This implies that the industry has diverse competitors whose strategies and relationships are diverse.

The government initiatives and incentives are incorporated in the sector to facilitate the easier expansion of small and medium enterprises. As the sector continues to incorporate research and development implies that organizations will likely explore diverse energy resources leading to diverse market share resulting in elevated competition and hence desirable prices that gives the consumers value for their money. The level of competition is largely defined by increased research and innovation. Some organizations embrace new innovative projects and fund them to meet the energy level required for the grid connection (Wehrmann, 2020). In a nutshell, the sector in the country features a tremendous industrial rivalry since the competitors are many, although industrial growth is high. Products are primarily differentiated, and the competitors are strategically diverse.

Bargaining power of buyers

In Germany, the cost of power is significantly higher compared to other parts of the world, such as the United States. This is because the government has constantly been investing in renewable energy sources to achieve cheaper energy in the long term. This implies that all households are continuously supporting the government in the energy transition through the inclusion of surcharges, taxes, and grid fees (Lehr et al., 2012). According to Porter (1998), the buyers are known for demanding a lot. As such, they want to buy the best available offerings at their disposal while paying the least amount possible. This puts pressure on all organizations in the energy sector and their profitability in the future. An organization that features a powerful consumer base features a higher bargaining power of consumers as they will seek discounts and offers.

Organizations that invest in renewable energy production targets enterprises, either small, medium, or large corporations. Most households are embracing renewable energy sources such as solar power even though the initial cost may be high. With the possibility of breaking even within a short time, the consumers, especially business owners, are opting for the system (Hansen et al., 2019). The organizations that derivers the full services, including installation, have been attracting a plethora of consumers, while prices are largely even. The organizations have been heavily investing in the research and development of sustainable systems, especially the inclusion of efficient batteries for solar power storage. Large corporations in the sector focus on large power plants and installation, while the small and medium enterprises deal with domestic and small household installation (Hansen et al., 2019).

Bargaining power of suppliers

In Germany, the suppliers in the renewable sector are numerous. The country boasts significant natural resources that are primarily under-utilized, especially for the generation of energy. The presence of raw materials implies the cost of production is significantly reduced. Due to investment in research and development, large corporations can produce sufficient products based on the market demand (Statista, 2021). The rising demand for products that facilitate the generation of energy from renewable sources ensures that the suppliers ought to rise to the occasion to satisfy the demand. In this case, they have price control, and consequently, the bargaining power is strong. As previously mentioned, the large corporations in Germany have significantly invested in innovation, implying that the suppliers supply fairly standardized materials that are less differentiated while featuring low switching costs (Porter, 1998). This makes the buyers in the sector switch suppliers at will, making the supplier's bargaining power significantly weak.

Organizations work with others that operate within the sector to complement their services and products. As such, they source their raw materials from various suppliers to meet their production capabilities. They are responsible for the profitability of the manufacturing organizations in the sector. All the firms in the renewable energy sector in Germany are significant consumers of the materials that the suppliers provide. This means that the profitability of organizations, especially the ones that source their products from other suppliers, largely determines reasonable pricing. Some of the corporations are driven by innovation through research and development collaboration with the suppliers for easier separation based on the products they are integrating for profitability (Bechberger & Reiche, 2004). Collaborations with other organizations in the sector invoked a wave of control where the largest organizations bought the smaller organizations for ease of operations.

Threat of substitutes

In Germany, the renewable energy sector features a few substitutes. Significantly, the low-end enterprises produce the substitutes implying that there are no limits to the firm's profitability in the sector. According to Porter (1998), whenever a new product or a service is able to address the needs of a consumer in diverse ways, the profitability of the industry is significantly affected. A substitute product or service that offers significantly high value by being unique from the existing products, hence offering a higher threat in the sector. An effective substitute in the sector is non-renewables that consequently increase carbon emissions and are largely expensive in the long term (Kreuz & Müsgens, 2018). Renewable sources of energy are primarily naturally occurring, like solar. Incorporating appropriate technology to tap the potential provides the consumers with adequate quality of energy that is cheaper and environmentally friendly, among other advantages.

As such, an organization aiming to invest in the sector needs to focus on providing quality products for its consumers. As a result, the clients will opt for their products as they provide a higher value for the clients' money as compared to the value provided by the substitute products. Furthermore, the German government has been phasing out sources of energy such as coal implies that the organization will invade only the environmentally friendly and cheaper energy sources (Kreuz & Müsgens, 2018). As such, organizations ought to differentiate their product significantly to ensure the clients value the uniqueness of the product and consequently not to opt for substitute products for its advantages. Usually, providing such products that give the consumers value for their money helps in understanding the needs of the consumers and consequently evaluate them through research and provision of products that meet their needs.

Barriers to entry

The renewable energy sector in Germany is dominated by an organization that has heavily invested in research and development. This leads to innovation which is integral to the advancement of the sector. As such, it is reasonably futile for new organizations to enter the industry. This implies that the large corporations specializing in production at high capacity have a cost advantage and ensure that the new business's production cost is costlier, making their threats a weaker force (Porter, 1998). A new organization in the sector ought to incorporate innovation and integrate new ways of doing things to pressure existing organizations. They can equally integrate low prices, minimized costs, and new value to the consumers.

The product differentiation is strong in the sector where the sector sells differentiated products instead of standardized products. Starting big requires enormous capital, making it futile for new entrants to set up their operations due to the high expenditure required. Furthermore, there is a need for increased research and development, making new entrants a weaker force in the sector. Government policies are crucial in Germany concerning the energy sector. An entrant ought to meet strict and legal requirements to begin their operations (Blazejczak et al., 2014). Besides, the government offers the renewable energy sector incentives and while incorporating policies to ensure new entrants succeed, making it a strong force. Nonetheless, the access to the distribution network is largely welcoming for the new entrants as they can easily set up a distribution network and begin their operations, making the threat a strong force in the sector.

Conclusion & Recommendation

A new business in the sector can incorporate the five forces developed by porter to determine the feasibility of their investment. This is because the strategic planners can understand various factors and how they can impact the sector's profitability. A stronger force implies minimal profitability, while a weaker force implies greater revenue. For example, the German government has invested significantly in efforts focusing on programs aimed at renewable energy promotion and the green technology market in the country (Hansen et al., 2019).

The forces inform the new entrants on the various avenues to emphasize when developing a new business. The country is primarily focused on achieving a green economy, and this promises an opportunity for investors. The forces allow an investor to exploit the opportunities as they can shape the forces to suit their mission. The country has been at the forefront of adopting solar energy. As such, this is an opportunity that can be exploited by setting up a business that provides solar products and installation for residential centers, small and medium businesses.

References

Bechberger, M., & Reiche, D. (2004). Renewable energy policy in Germany: pioneering and exemplary regulations. Energy for Sustainable Development, 8(1), 47-57.

Blazejczak, J., Braun, F. G., Edler, D., & Schill, W. P. (2014). Economic effects of renewable energy expansion: A model-based analysis for Germany. Renewable and sustainable energy reviews, 40, 1070-1080.

Hansen, K., Mathiesen, B. V., & Skov, I. R. (2019). Full energy system transition towards 100% renewable energy in Germany in 2050. Renewable and Sustainable Energy Reviews, 102, 1-13.

Kreuz, S., & Müsgens, F. (2018). Measuring the cost of renewable energy in Germany. The Electricity Journal, 31(4), 29-33.

Lehr, U., Lutz, C., & Edler, D. (2012). Green jobs? Economic impacts of renewable energy in Germany. Energy Policy, 47, 358-364.

Porter, M. (1998). Competitive Strategy, New York Free Press. Porter Competitive Strategy 1980.

Wehrmann, B. (2020, April 17). Solar power in Germany – output, business & perspectives. Clean Energy Wire. https://www.cleanenergywire.org/factsheets/solar-power-germany-output-business-perspectives.