The new economy in the energy market : how do startups contribute to the development of sustainable innovation in the Dutch energy sector?

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AMSTERDAM BUSINESS SCHOOL

UNIVERSITY OF AMSTERDAM

The New Economy in the

Energy Market

How do startups contribute to

the development of sustainable innovation

in the Dutch Energy Sector?

Linda Johanna Helena de Jong

11122838

6/24/2016

Final Master Thesis

MSc Business Administration

Entrepreneurship and Innovation Track

Supervisor:

Dr. Ileana Maris -de Bresser

Second reader:

Prof. Peter van Baalen

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Statement of Originality

This document is written by Student Linda de Jong who declares to take full

responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and

that no sources other than those mentioned in the text and its references have

been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision

of completion of the work, not for the contents.

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Abstract

This qualitative research will investigate how startups will influence the development of sustainable innovation in the Dutch energy sector. In this market the energy transition is a topic issue, which concerns all players in the market. As from the liberalization of the market, the competition is rising, the demand for more renewable energy by consumers is increasing and the governmental regulations have become stricter. The Netherlands lags behind in their transition towards a more sustainable society. Startups are perceived to bring radical innovation to the market, but incumbents seem to stem this development to save their own investments. Hence, how will startups influence this transition in the energy market? This will be investigated in this study by means of a single case study. Two national startups, eight local cooperatives and one incumbent have been asked open-ended questions in semi-structured interviews. The findings of this study contribute to the current literature in three ways by identifying: i) the factors that influence the sustainable innovations in the energy market, ii) the incentives for startups to engage in sustainable innovation in this market, and iii) the core concept that influences the ability of startups to engage in sustainable innovation. This core concept is called the New Economy and exists of the factors: a new business model, in which offering services get more important than delivering products; civic participation, which creates support for new energy projects; and a decentral approach by which the company focusses on local projects and has closer ties to its customers.

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Introduction

The Climate Change Conference in Paris is nearly half a year ago, discussion in the parliament and advertisement of new energy suppliers on your computer and television: one of the industries that is changing a lot in the last couple of years, is the energy sector. Due to climate change the energy sector has to change and this has impact on international, national and even local scale. The focus of this research is the Dutch energy market and more specifically the transition of this market towards a sustainable industry.This industry is under pressure to engage in sustainable innovation because of stricter regulations (“Klimaatconferentie,” 2015), increasing competition (“De 100 belangrijkste startups,” 2016), and awareness of consumers (Dean & McMullen, 2007). The large incumbents seem too slow to speed up this transition; therefore startups are seen to be the kind of companies that are going to speed up the transition with radical innovations (“De 100 belangrijkste startups,” 2016).

In the last couple of years two trends in the Dutch energy industry are noticeable. The first one is the liberalization of the industry; before this transition the place of residence was determining for the energy supplier that served in that region. Since 1 July 2004 consumers have the freedom to choose their own supplier based on their preference, which has increased the competition in the industry (“Nederlandse energiemarkt,” 2015). This increased competition can be found in the amount of new suppliers listed since 2004 (“Energieleveranciers – Vergunninghouders elektriciteit,” 2015). The second movement in this industry is the sustainable development of energy (“Nederlandse energiemarkt,” 2015). Dean and McMullen (2007) discovered in their research that there is a growing desire of many individuals for the end of activities that have a negative effect on the environment. Moreover, they observe an increasing willingness of consumers to pay a bit more for products and services that reduce the impact on the environment.

This movement is, however, not only demanded by consumers it is pushed by the government as well, because the Netherlands need to act upon the regulations settled by the European Union. During the Climate Change Conference of the United Nation in Paris November 2015 is come to an agreement that halfway the 21th century there need to be a balance between the emissions and the capability of the nature to absorb this (“Klimaatconferentie,” 2015). The energy sector is one of the industries in which the

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consumption and the production are especially unsustainable. Some examples are the “excessive use of non-renewable resources, low levels of energy efficiency, and high levels of carbon dioxide emissions” (Wüstenhagen & Boehnke, 2006; 253). With the use of renewable energy like wind, water, solar and biomass, the energy sector can almost totally eliminate its CO2 emissions by 2050. Hereby this sector has the highest potential of all sectors to contribute to the total reduction of the greenhouse gas emission (European Commission, 2011) by means of initiating sustainable innovation.

According to Negro, Alkemade and Hekkert (2012) the renewable energy diffuse so slowly because of a lack of technological knowledge by policy makers, misalignment or regulations that block the development and the capabilities of entrepreneurs to act together to form a message to the government that there is a need for policy reforming. Large energy companies still have too much voice in the Dutch politics. Those traditional companies want to slow down the development of renewable energy, because they fear that their investments in large gas-fired and coal power plants will not become economically profitable (Schoor & Scholtens, 2015). In their article Schoor and Scholtens (2015) state that renewable energy is perceived as a threat for the business model of those incumbents. What could be seen as a possible response on this slow transition is the number of local and decentralized sustainable energy initiatives that is rising; more citizens and local companies and institutions take the generation of energy for their own account (Schwencke, 2012). This research will investigate why exactly small ventures contribute to the transition of the energy market instead of the big incumbents, which actually have the capabilities and resources to change the market.

This phenomenon of startups that are more likely than incumbents to bring disruptive innovations to the market is investigated before. It is a common perception that large incumbents rarely introduce radical innovations, instead they introduce incremental innovations (Chandy & Tellis, 2000). Incumbents find innovations most challenging when those are disruptive of management processes, organizational structures and existing markets. When the product life cycle, the risks and the demands are difficult to predict, incumbents allocate existing resources and introduce just incremental changes, therefore their innovation process is slow. Startups, on the other hand, will take this risk, because it is their opportunity to grow rapidly, to achieve operating activist and scale. They will, therefore, profit from the slow innovation process of incumbents by starting and growing their new companies in the meantime (Freeman & Engel,

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2007). The reasons why innovative entrepreneurs will take the risk and establish their new companies, instead of the slow incumbents, is that those entrepreneurs are less susceptible to preserve the status quo, they are even motivated to change this status quo (Dyer, Gregersen & Christensen, 2008). Those studies give attention to the role of startups in generating innovation in general sense; they do, however, not describe their role in generating sustainable innovation.

The sustainable development in the energy sector, the energy transition, has been researched before. Those researches can be developed in three groups; one group has focused on energy transitions in the past, to provide information that could be needed in the energy transition of the 21th century, which needs to be more rapid than the ones in previous centuries (Solomon & Krishna, 2011; Grubler, 2012; Allen, 2012). The second group looks into the future. The upcoming new technological development of smart grids is described by Erlinghagen and Markard (2012), who investigate the role of the IT sector in this development, and by Clastres (2011), who investigates what the implications of smart grids are and the associated information flow. The third group evaluates the energy transition so far; Negro, et al. (2012) describe that the reason why the renewable energy is the dominance of incumbents and the government. This dominance is also pointed out by Kern and Smith (2008) with the Netherlands as specific case. The first group express the energy transition is needed, the second group points out that new technology will play an important role in the transition, and the third group describes the dominance of incumbents and governments in the energy sector.

These theories describe that startups are perceived to bring radical innovations, and that sustainable innovations are needed in the energy sector. The link between both theories is, however, missing. So far there has been limited research on the role of startups and their influence on the development of specifically sustainable innovation in the energy sector. The dominance of incumbents in the energy market is researched before, as described above, but how startups enter this market is not clear from previous research. What will be the response of incumbents when those startups enter the market; will they get in competition with them or will they collaborate?

This research elaborates on the work of Hall, Daneke and Lenox (2010) and that of Hockert & Wüstenhagen (2010). Both works illustrate the influence of the entrepreneurs/startups on the sustainable development of the market. That entrepreneurship in many articles is being recognized as a significant conduit for bringing about the transformation in the industry is

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detected by Hall et al. (2010), but they do not know to what extent entrepreneurs have the potential for creating a sustainable market. Hockerts & Wüstenhagen (2010) go a step further; they state in their research that small firms even as big incumbents both get stuck in their sustainable development and therefore a sustainable market is much more likely to be created by co-evolution of both parties, when they combine their complementary skills and challenges. Both articles suggest that further research need to be done in a specific industry: Hall et al. (2010) would like to see this in an industry where entrepreneurial ventures instead of incumbents provide sustainable services and products, and Hockerts and Wüstenhagen (2010) recommend doing an in-depth case study in sustainability-related industries such as water, energy and transportation. This research answers to the calls made in both articles by conducting a case study in the energy sector, a market in which entrepreneurial ventures seems to provide sustainable services, sometimes even faster or better than incumbents.

The aim of this study, according to the analysis of previous studies, is therefore threefold. First, this study will investigate what the dominance of the incumbents in the Dutch energy sector means for the entrance of new startups, and thereby for their influence on the development of sustainable innovations. Secondly, the incentives for startups to engage in sustainable innovations will be investigated and the obstacles they face in this process. Thirdly, after elaborating on each separately, the collaborative role of startups and incumbents will be researched. Their incentives as well as constraints to collaborate with one another will be discussed. To identify those findings, the research question is therefore formulated as: ‘How do startups influence the development of sustainable innovation in the Dutch energy sector?’ To answer the research question, a qualitative case study is proposed. Two national startups, eight local cooperatives and one incumbent are being asked open-ended questions in semi-constructed interviews.

The importance of this study can be found in its contribution to the findings of the previous mentioned related studies. In this study will be explored if the common perspective of startups who, rather than incumbents, introduce radical innovations, is applicable on the energy sector as well. It will also provide a great deal of information about how the energy transition in the 21th century, in a country like the Netherlands, develops and what role startups play in this transition. When startups’ role towards new technologies will be identified in this study, it can provide a better understanding of how the energy transition will develop towards the future.

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Moreover, this study will present how startups deal with the dominance of incumbents and if they will approach each other to collaborate.

The practice of this study is important for incumbents in the energy market. When they know what startups triggers to engage in sustainable innovation and what their influence is on the transition; incumbents can make a better estimation of their competitive position towards startups. Through this study incumbents can deduce if it is better for them to collaborate with startups or oppose them. At the other side, this study can also be helpful for new startups, which plan to enter the Dutch energy market. When they want to speed up the energy transition by engaging in sustainable innovations, just like the interviewees wanted, this study will show them which aspects will truly influence this development and their ability to generate sustainable innovations. In addition, this study is important for regulations in the energy sector. When governments truly want to speed up the energy transition, this study shows which aspects of startups, which influence the sustainable innovations, they can support to contribute to a sustainable energy industry.

The next part is the literature review in which all the literature relevant for this topic is being analyzed, starting with sustainable innovation. Thereafter a closer look will be taken into the role of incumbents and the role of startups, first separately and thereafter their collective role. After the literature review will be explained how the research is been done and what method is used. Subsequently the results will be presented and explained, which will be followed by the discussion and conclusion of this research.

Literature Review

Sustainable innovation

This research will investigate what the influence of startups is on the development of sustainable innovation. In the overview of Boons et al. (2013: 2 & 3), two definitions of sustainable innovation are given. The first is defined as an ‘innovation that improves sustainability performance’ and the second is ‘sustainable innovation is a process where sustainability considerations (environmental, social and financial) are integrated into company systems from idea generations through to research and development (R&D) and commercialization. This applies to products, services and technologies, as well as to new

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business and organizational models’. In the latter paper is noticed that the term sustainable innovation is used to address social and ethical as well as financial and environmental dimensions of sustainability.Klewitz and Hansen (2014) define this term as sustainable-oriented innovation (SOI), which creates more sustainable consumption patterns, market structures and productions methods.

This type of innovations can be divided into radical and incremental innovations of which the radical innovations are perceived to have more influence on the sustainable development of the whole industry (Klewitz & Hansen, 2014). Radical innovation is the drastically reconstruction of technological products and systems in order to contribute to radical system shifts towards eco-efficiency. This is necessary to achieve emissions targets for instance (Hellström, 2007). When firms will engage in sustainable innovation they will face an additional challenge on top of the challenge that is caused by a conventional innovation. Namely, due to technological spill-overs an innovator cannot gain the full value of an innovation. On top of this first externality a second externality will be faced in the case of sustainable innovation, this is the presence of external cost. Those extra costs include the special efforts sustainable innovators have to make to convince customers and the external costs that are internalized by the government, which is playing a more important role in the commercialization of a sustainable innovation. This is called the double externality problem by Rennings (2000).

The term sustainable innovation is often used interchangeably with ‘eco-innovation’. Although, it should be used to specifically address economic and environmental dimensions. The European Commission (2011) defines this term, in the introduction of a communication to the European Parliament, as ‘eco-innovation is any form of innovation aiming at significant and demonstrable progress towards the goal of sustainable development, through reducing impacts on the environment, enhancing resilience to environmental pressures, or achieving a more efficient and responsible use of natural resources.’ Eco-innovation will exist by technology and regulatory push factors and market pull factors (Rennings, 2000), that all contribute to the reduction or avoidance of negative environmental impacts. In this case especially the regulatory push factors -the stricter regulations of the EU-, and the market pull factor -customer demand and competition- play an important role.

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Factors influencing sustainable innovation

The industry in which the sustainable innovation takes place in this research is the Dutch energy sector. In this case the development of sustainable innovation is uttered by the generation of more renewable energy sources and technologies in order to reduce the negative environmental impact and to reduce the dependency of a country on foreign gas and oil (Negro et al., 2012). The articles of Jocobsson and Johnson (2000) and of Jacobsson and Bergek (2004) demonstrate the increasing interest in the transformation in the energy sector towards the use of more renewable energy. This transformation requires, besides a radical change in the generation of power from nuclear and fossil to wind, solar and other renewable energy sources, also the development of a smarter grid. This new infrastructure is needed to cope with decentralized power sources that possibly generate on an intermittent base (Erlinghagen & Markard, 2012). Those smart grids will assist the integration of new technologies and optimal use of renewable energy sources, which will boost the development of those sources (Clastres, 2011). Although those new technologies will help, until now the process of development, implementation and diffusion of renewable energy technologies (RETs) is too slow according to Negro et al. (2012).

To analyze this slow development, three features about the energy sector should be taken into account (Jacobsson & Bergek, 2004). First, the energy system is huge; it takes very long-term perspectives to develop a market of such size. Second, the transformation of markets is not easy, since new technologies often have cost disadvantages in the beginning and may offer no direct benefit to the individual buyer. Moreover, incumbent technologies often profit from subsidies, which is hard to compete with by new technologies without this financial support.

Dominance of incumbent firms

The third feature about the energy sector is the power of incumbents on the institutional framework.In comparison with other European countries, in which the government supports the development of renewable energy much more, the Netherlands lags behind because of their inconsistency in policy making (Boons et al., 2013). According to Schoor and Scholtens (2015) incumbents perceive the renewable energy new entrants bring to the market as a threat to their business models. It depends on the degree to which incumbents can benefit from future policies if they will response reactive or proactive to new entrants (Stenzel & Frenzel, 2008). In fact, the standard model even suggest that incumbents will be harmed when new entrants come to the

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market with radical innovations, because of incumbents’ i) organizational inertia, ii) embeddedness in an established value network, and iii) prior strategic commitments, and iv) their disincentives towards radical technology investments (Hill & Rothaermel, 2003). The first two express the low transformative capacity of incumbents because of they are restricted by established frames and existing regime structures (Erlinhagen & Markard, 2012). In the energy sector this could be institutional rules and long-term contracts. The last two obstructions could be expressed as the huge investments in traditional energy plants that incumbents need to earn back (Schoor & Scholtens, 2015). Because of all those factors incumbents do not stimulate the entrance of new ventures; in fact, they use their strong connections in the Dutch politic to slow down their entrance (Negro et al., 2012). This dominance of incumbent energy regime, that undermines the ambition of the Fourth Dutch National Environmental Policy Plan (NMP4) of 2001 for radical innovation, has two consequences (Kern & Smith, 2008). First, it led to the selection of actors, niches, pathways and themes that fit to the traditional existing regime, which causes no structural changes. Secondly, it is difficult to put pressure on the dominated incumbents, because that will harm their business, while their engagement is needed in the transition process.

In this study, I would like to find out what this dominance of incumbents actually means in the Dutch energy sector and what its effect is on the entrance of young companies and thereby its effect on the development of sustainable innovation. I want to examine how this dominance is still present nowadays and how different parties deal with this dominance. It is interesting to find out how new entrants try to counteract on the pressure of incumbents, while those new ventures, perhaps at the same time, need those big traditional companies in the transition process of the energy markets. Although this dominance of incumbents can make it hard to enter the energy market, many new companies have started their business in the last couple of years, see Appendix I. In the next paragraph will be described what the literature, so far, can tell us about how entrepreneurship can contribute to sustainable innovation.

Realization of sustainability innovation through sustainable entrepreneurs

The realization of (radical) sustainability innovations for the mass market to provide benefit to a larger part of society, and often the unmet demand of more stakeholders, is sustainable entrepreneurship (Schaltegger & Wagner, 2011). Sustainable entrepreneurship can

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reduce the environmental impact of market failures like: i) firms are not perfectly efficient, ii) externalities exist, iii) pricing mechanisms work imperfectly, and iv) information is not perfectly distributed (Cohen & Winn, 2007). Those market imperfections create on the other hand entrepreneurial opportunities to introduce innovative business models and technologies. ‘How opportunities to bring into existence ‘future’ goods and services are discovered, created, and exploited, by whom , and with what economic, psychological, social, and environmental consequences’ is how Cohen and Winn (2007: 35) define sustainable entrepreneurship. The exploitation of potentially profitable opportunities is entrepreneurial action that can motivate government action, disseminate information, reduce transaction costs and develop economic institutions and property rights. The act of this exploitation together with the growing desire of individuals to reduce environmental burden and their willingness to pay enhance the ecological sustainability (Dean & McMullen, 2007). Also Hall et al. (2010) declares that there is a growing recognition of the fact that a fundamental transformation is needed to reduce social impacts and detrimental environments which are caused by unsustainable business practices. According to them entrepreneurship is increasingly recognized as the method to realize this transition. There are a couple of incentives why entrepreneurs from small and medium size enterprises will engage in sustainable innovation: i) compliance with regulations (regulatory push factor); ii) customer requirements (market pull factor); iii) possibility to gain competitive advantage (market pull factor); iv) the financial incentives, like subsidies, cost savings and public financial support. On the other hand, entrepreneurs have some considerable obstacles in comparison with large incumbent firms: i) a much smaller financial capital, ii) lack of time and iii) qualified personnel (Vasilenko & Arbačiauskas, 2012). Those are limitations of the impact that entrepreneurial ventures can have on the sustainable transformation of an industry (Hockerts & Wüstenhagen, 2010). Because the incentives are equally present as the obstacles in the market for entrepreneurs to engage in sustainable, the role of entrepreneurs in the transition towards a more sustainable society and their extent of creating those sustainable economies remain uncertain (Hall et al., 2010).

Hence, according to the literature, entrepreneurs engage in sustainable innovation because of the opportunities that derive from market failures, the incentives which market pull factors offer and the pressure from stricter regulations. Therefore, I would like to find out what those opportunities, incentives and obstacles are for the startup entrepreneurs in the Dutch energy

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market. I will examine what opportunities they have seen to enter this market and which of the incentives, mentioned in the literature or specific to their own case, is applicable on their business. During the development of their businesses they probably would have face obstacles hinder progress. I will find out what those obstacles are and how they deal with them. Above all, I will focus on how startups, influenced by all those factors, contribute to the development of sustainable innovation in the energy sector, since they are seen as the method to transform the market towards a sustainable economy (Hall et al., 2010).

The collective role of startups and incumbents: a co-generation of innovation perspective Any market has both incumbents and startups operating. Hockert & Wüstenhagen (2010; 489) identified with their research that the literature ‘so far has neglected the differential roles of large and small firms in transforming industries towards sustainable development.’ They argue that sustainable transformation of an industry will not be realized by either Davids or Goliaths alone. Davids are small, relatively new companies with a small market share that often bring radical innovations to the market. According to Hockert and Wüstenhagen (2010) they will get stuck in their low-market penetration, high-quality niche. At the same time, Goliaths - big, older companies with a large market share - will response to cost pressure by lowering the sustainable quality of their products and services. Hockert & Wüstenhagen (2010) therefore argue that the sustainable transformation of an industry will be brought about by the co-evolution of ‘emerging Davids’ and ‘greening Goliaths’. This is more likely than either of the two alone would be able to achieve that. Because both type of firms will get stuck, Hockert and Wüstenhagen (2010) argue that only the co-evolution of both actors will bring about sustainable transformation.

One way to realize the co-creation of startups and incumbents is the use of complementary assets. Teece (1986) was the first who used this term. Examples of complementary assets are: competitive manufacturing, marketing and after-sales support, these assets are almost always needed (Stieglitz & Heine, 2007). A tight integration of internal and external knowledge –complementary assets-, is needed for the innovation strategy of the firm to capture the positive effects of each of those innovative activities (Cassiman & Veugelers, 2006). Those complementary assets are used in two kinds of alliances, according to Colombo, Grilli and Piva (2006: 1170). The first kind is exploitative alliances, in which more intensely partner’s capabilities and assets are used through task diversion. New entrants can get access to

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specialized assets which are owned by possible partners, as a result they can successful commercialize their innovative knowledge. Examples of those assets are: ‘well-known brand, trained sale force, specialized distribution channels, knowledge of international markets, low-costs manufacturing capacity, network of reliable suppliers, and other assets that are often controlled by large incumbent firms.’ The other type of alliances is the explorative one, also called the technological alliance. Those alliances are formed to build new capabilities and to explore opportunities. Through this alliance, new entrants get access to the complementary technological knowledge owned by (possible) partners, which is very difficult for new entrants to reproduce themselves. Another motive for this type of alliance is inter-organizational learning. A firm can extend its collection of capabilities.

This innovation strategy of forming alliances is used by incumbents as well as by new entrants to get access to complementary assets that they could not have reproduced themselves. It is a response to the radical technical change new entrants brought to the market. Those alliances help incumbents to focus more on exploration instead of only exploiting their competitive advantages and vice versa for new entrants. The purpose is to establish new products and optimize their performance (Rothaermel, 2001). To keep an eye on the entrepreneurial innovative activities of new entrants, incumbents use corporate venture capital (CVC). New entrants can lend the money of incumbents to exploit their innovative ideas. At the same time, incumbents will learn from those innovations, this is an important part of their strategy (Dushnitsky & Lenox, 2005).

In this study, I will examine if incumbents and startups collaborate and for what reasons. It will be interesting to find out what kind of complementary assets incumbents have that startups need to help them develop and grow their business. At the other side it is interesting to know what kind of complementary assets startups possess that can help incumbents in their process of development. This study, therefore, also elaborates on what kind of alliances they work together and what influence those collaborations have on the development of the sustainable innovation in the energy sector.

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Methodology

Case study description

For this study, a case study research was conducted. The case of this research is the development of sustainable innovation in the Dutch energy sector, the transition of the market. The case study approach helps to investigate this contemporary phenomenon in a real-world context (Yin, 2009). Yin (2009) approaches three situations in which should be chosen for a case study: i) the research question is a ‘how’ question; ii) the researcher has little or no control over behavioral events; iii) the focus of the study is contemporary, since the transition of a market is a process. This study is a single case with embedded units, since a number of startups and an incumbent have been investigated within the same industry, the Dutch energy sector. The approach for this research is deductive as well as inductive, therefore theory is used to structure the analysis process, and at the same time emerging data is used to generate new theory to answer the research question. This research explores situation of how startups influence the development of sustainable innovation of the industry, which makes it an exploratory type of case study (Yin, 2003). Hence, the unit of analysis is a number of founders, directors and managers who will help to draw an overall picture of the process. The focus will not be on the individuals themselves (Baxter & Jack, 2008).

This research focusses on startups which bring sustainable innovation to the Dutch energy market. The companies that are investigated needed to be sustainable startups. Besides the age of the company, to identify it as a startup, the level of sustainability is taken into account. Sustainability is not only limited to environmental aspects, but also social and economic dimensions (Hockert & Wüstenhagen, 2010). To get insight of the age of companies a publication of the Dutch company Autoriteit Consument and Markt is used (“Energieleveranciers – Vergunninghouders elektriciteit,” 2015). In this list the dates of the authorization of certificates of ACM are provided for every energy company which was established as from 2011. Companies need this certificate to be allowed to sell energy to consumers. Therefore those dates indicate when companies officially have started their business. 19 companies out of the 52 in this list got the certificate after 2012, see Appendix I. This means that they are not older than 3 years, therefore perceived as relatively new entrants and therefore perceived startups.

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For the selection on the level of sustainability, the ranking list of the green energy suppliers in the Netherlands provided by Greenpeace is used (“Ranglijst groene stroomleveranciers“, 2016). This list indicates which energy supplier offers consumers direct stimulation of sustainable energy. Of the 39 companies, 4 score higher than a 9 on a 10 point scale. Of those 4 companies, 3 of them are also established after 2012. These companies are Qurrent, Vandebron, and Duurzame Energie Unie, accordingly those 3 companies are perceived as very green startups. Those three companies settle with their sustainable operations social and economic criteria as well: i) Qurrent claims to sell its energy for cost price and strive towards a balance between the use of energy and self-generation. ii) Vandebron claims that it does not use a profit marge when selling energy, like traditional energy suppliers do, they only ask for a subscription fee. Moreover, the farmers who generate energy get a fair price. iii) Duurzame Energie Unie supports the local economy by selling energy from local farmers. All of this indicates that those three companies are highly suitable for this research. Of those 3 targeted companies, Qurrent (Q) and Duurzame Energie Unie (DEU) have been interviewed; Vandebron was unfortunately not in the position to take part in this research. Qurrent and Duurzame Energie Unie are both cooperatives that have smaller firms as there members. Of Duurzame Energie Unie eight members have been interviewed: Almeerse Wind (AW), De Groene Reus (DGR), Eigen Wijkse Energie (EWE), Energie Gilze Rijen (EGR), Groenwaterland (GWL), Tegenstroom (TS), Texel Energie (TE), Zeeuwind (ZW). Except for Zeeuwind, which was found in 1987, all others are starts-ups and new in the energy market. Of the company Qurrent an extra interview has been taken with one of the staff members of the marketing team, because the marketing manager, with whom the interview was planned, was not able to be present that first meeting. The ten energy companies are all cooperatives, in this business structure clients are customers and members at the same time; they co-create and coproduce with the company. They are for example co-owner of a windmill or a roof full of sun panels.

As the collaboration between a startup and an incumbent will be investigated as well, Eneco (E) is interviewed, since it is also a member of Duurzame Energie Unie. Moreover, this incumbent ranks highest on the green supplier ranking, out of the five largest energy suppliers in the Netherlands, namely: Nuon, Essent, Delta, Eneco and E.ON.

The respondents should have some influence on the operational business of every day, the business strategy and on the innovation process. Preferable the respondents have worked for

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the company since its establishment; more information can be given about decisions they made around the time of the establishment of the company. Because of this and of the fact that most of the interviewed companies are quite small -between 10 and 50 employees-, the founders and directors have been approached directly. For Qurrent and Eneco is been spoken with the marketing manager and the innovation manager respectively. Information about the board positions was found on the webpages of the companies with additional search for information on LinkedIn.

Research instruments and procedures

In this research it is important to get an as clear as possible picture of the developments in sustainable innovation in this industry; the total transition needs to be illustrated. To realize this, the following research methods are used:

Semi-structured interviews

The qualitative interviews taken in this study were semi-structured. This gives an insiders perspective on the research topic, details and depth (Leech, 2002). Open-ended questions are used to give the opportunity to the interviewee to show its personal insights on specific topics. This generates more information and a deeper understanding than beforehand could be thought of. The topics to which the questions refer are the development of sustainable innovation in the energy sector, the role of startups in the energy transition and the interaction between startups and incumbents. Will they cooperate and learn from each other or will they compete heavily. Examples of those interview questions are: What kind of sustainable innovation as your company brought to the market? Did you experience a lot of resistance when this startup established? Are you competing with incumbents on the same target group or do you serve a sustainable conscious group that incumbents do not aim for? Do you have any partnerships with incumbents? What were the incentives to invest in sustainable innovations?

. The interviews were either taken at the companies’ office or on a public location. The time of the interviews depended from 45 minute to an hour, this primarily depended on the availability of the interviewee. The interviews were recorded with the permission of the interviewees; those records were used to accurately transcribe the interviews. Since a combination of a deductive and an inductive approach is used for this research, the interviews were structured with a couple of ‘starter codes’, which were based on the literature, the deductive

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approach. During the coding of the transcriptions new emerging codes and themes came up, the inductive approach. Hence, either during the data collection as during the data analysis, new codes were developed (Bourque, 2004).

To structure the qualitative data analysis, chapter ten of the book of Mortelmans (2009) is used, since this gives a very detailed explanation throughout the whole process in four clear steps. For every step several methods and graphical designs are presented with clear examples. After the first step, which is described in the methodology section above, namely the preparation of the data, Mortelmans’ second, third and fourth step are based on the three steps of Strauss and Corbin (1990). Those are respectively: open coding, axial coding, and selective coding. In the second step, the open coding phase, codes are connected to fragments of the text to explain their content (Mortelmans, 2009). This labeling is done to all interviews and external data. To structure all those different codes, a codebook is created (Saldana, 2015). It contains the following: the name of the code, names of the sub codes, the explanation of the code founded in the literature review and quotes out of the transcribes of the interviews to which the code was labelled. Those tables can be found in Appendix III up to Appendix IX. Fragments that could not be linked to a specific concept, but could be used for the overall analysis, were written down in memos. This is also the case for thoughts that emerged during the process of analysis, which could contribute to connecting the different concepts together (Corbin & Strauss 2014). The creation of those concepts is done in the third step, the axial coding phase. All codes were examined in terms of concepts and sub concepts which are defined in characteristics and dimensions (Mortelmans, 2009). To clarify the data and display it in such a way that connections between concepts and sub concepts are easily observed, a graphical presentation was created (Miles & Huberman, 1994). This illustrative graph can be found in Appendix II. During this phase memos were used as well, those already seem to look like provisional analysis results (Mortelmans, 2009). Mortelmans (2009) fourth step, and Strauss and Corbin (1990) third, is the selective coding phase. In this step a core category was chosen that needs to be connected to most of the concepts to eventually identify the results.

The analysis of the data retrieved from the interviews and external documents resulted in findings which will be presented following the research objectives. Those research objectives are related to the subsections in the literature review and will help to answer the research question. In this section first-order data as well as second-order data will be used to give a better insight in

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the process of how the results developed from the raw data. Each subsection will be supported by a table in which the first-order data is processed. These tables can be found in the Appendix III up to Appendix IX. Each table shows the codes, which were used to label the interviews and documents initially, the description of those codes and an example quotation from the interviews. Those examples help to structure and ground the findings of the subsections. The second-order data can be found in the overall graph, in Appendix II, which illustrates the relations between the subsections in a simplified manner. In this graph the concepts and themes found in the first-order data are linked to each other to present their intermediary relations. Each part of the graph will be discussed following the research objectives. The first one is about what the sustainable innovation in the Dutch energy sector means to the interviewees. Subsequently will be looked at the role of incumbents and the role of startups, first separately and thereafter will be looked at their collaborative role. During the process of data collection it appears that in almost all interviews was spoken about the role of the government in the development of sustainable innovation in the energy sector. This is however not a specific variable in this research. Nevertheless, the findings related to the role of government will be discussed at the end of this chapter, since they play a significant role in the answers of the interviewee. In the discussion chapter will be elaborated more on this concept. During the analysis of those subjects a core concept developed that is related to all subject in a different way. Identifying a core concept is according to the fourth step in the qualitative data analysis method of Mortelmans (2009), as presented earlier. The core concept can be found in Appendix II.

Additional Data Analysis

Webpages of the companies and personal profiles are used to prepare the interviews and structure the questions. Innovation, market development and other business reports of the energy market are used to form a picture of how the transition in the energy market develops. According to Leech (2002), no information should be asked that could have been collected elsewhere. Research validity, reliability and generalizability

The biases that are possible during this qualitative research study are related to the trustworthiness of the data and the possibility to find the same results when doing this study over again. These have been overcome by proving its reliability and its validity. This study proves its reliability by the diversified position of its interviewees. The interviewed startups operate at

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different levels, two national startups and 8 regional and local startups. Moreover a national incumbent is interviewed, which is collaborating with one of those startups. The interviews were taken directly with the founders and for Qurrent and Eneco with their Marketing and Innovation Managers respectively. These diversified positions in the market and the high position of the interviewees in their companies, contribute to the trustworthiness of the results. This study proves its validity by describing the clear analysis method of Mortelmans (2009). Researchers who want to repeat this study fill find the same outcome when they follow the structured steps of (Mortelmans, 2009). The generalizability of this study is verified by the fact that even an incumbent, who operates in the market for a significant number of years, recognizes what kind of influences startups have on the development of sustainable innovations in the market.

Results

In this chapter, the findings of the empirical case study are presented. The findings are presented following the structure of the literature review. First will be described how the interviewed companies in this study view the sustainable innovation in the energy market, what they experience as influencing factors to engage in sustainable innovation, and what kind of externalities they face. Secondly, the findings will indicate the role of incumbents in sustainable innovation. The results show what incumbents’ motives are to restrain sustainable innovation. Thirdly the role of startups, their opportunities and incentives to engage in sustainable innovations, will be reviewed. And the end of this section the three most important sustainable innovations that startups bring to the market are illustrated. Consequently the collaborative role of startups will be reviewed. The last finding that will be discussed in this chapter is a variable that is poorly addressed in the academic literature. However, since it turned out to be an important factor influencing startups to engage in sustainable innovation. Therefore this factor, the role of the government, will be reviewed in this results chapter as well.

Sustainable Innovation viewed by the Interviewees

In this first section will be described what sustainable innovation means in the Dutch energy sector according to the interviewees. During interviews, questions have been asked that gave the interviewees the opportunity to express what the sustainable innovation is that their

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company brings to the market and what had triggered them to engage in sustainable innovation. Their answers offer an insider’s perspective on the energy market and an understanding of the business decisions the directors and managers have made towards sustainable innovation. Environmental, Social, Financial

As defined in the paper of Boons et al. (2013), sustainable innovation is a process in which sustainable considerations are integrated into the system of a company. Those considerations are environmentally, socially and financially grounded. Those three pillars are used to describe the views of the interviewees regarding sustainable innovation.

Environmental. At this point in time we use 1.4 times the planet each year, figuratively speaking (Luttikhuis, 2016), which means that we use every year 0.4 times more of the natural resources than the planet is able to reproduce in one year time. Since the sixties our knowledge about the possible dangers has increased. The awareness of environmental problems is growing each year in different kind of sectors. One of the sectors that plays a big role in the pollution of the earth is the energy sector. Large steps need to be made towards sustainability in this area. This is exactly what the companies strive for, which are interviewed in this research. The ten startups that are interviewed all generate 100% renewable energy, also called green energy. The members of the cooperatives generate renewable energy themselves, either by their own wind mile or sun panels or by investing in a wind mile or sun panel park. Some are only focusing on their own small community, like Energie Gilze Rijen, others, like Qurrent, address the whole Dutch energy market. What they all have in common is that they strive for a self-sustainable society in which even as much energy will be produced sustainably as will be used. When this situation is reached there is no need for unrenewable energy sources anymore. Which is confirmed by the founder of DGR: “Basically it is possible that grey energy will be

unnecessary anymore in the near future. I don’t have any doubts about this.”

The eleventh company that is interviewed is Eneco, although this is an incumbent, Eneco does not possess any coal or nuclear power plants like the other incumbents in this market do. Eneco is not a cooperative; therefore they formulate sustainable innovation a bit differently. Eneco states on their website: ‘A sustainable innovation is a development that fits the needs of the future without risking the capability of the future generations to fulfil their own needs.’ Sustainable energy provision contributes to deal sustainably with the world we live in inside the

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boundaries of our planet; in order that we have enough at 1 times the planet each year instead of 1.4 times.

Social. Since the fact that offering 100% green energy was not an innovation itself, the environmental pillar is not been highlighted much during the interviews. What is been highlighted more, is the social pillar. The startups described that the direct contact they have with consumers and the voice the consumers have in the company are sustainable innovation in comparison to large incumbents. “People need to get the idea: This is my own energy, my energy

company. I join the decision making, it’s our money, our energy, our club.”, as the manager of

EWE argues. All of the interviewees, even the incumbent Eneco, engage in local projects. An example of a local project that is supported by Eneco is: Wind turbine De Duinvogel, a windmill established by the cooperative Vogelwijk Energie (k) (“Samen met uw,” n.d.). For the national parties, Eneco and Qurrent, this is expressed in the collaboration with innovative startups and local cooperatives. For the local cooperatives that have been interviewed, those local projects are a support for the local economy and sometimes even for the local employment. When a small local company is asked to deliver a project instead of big companies outside town, the money of the project stays within the community, which supports the local economy.

Financial. The third pillar is the financial sustainable innovation. This is especially due to the cooperative business form of the startups. The incumbents still earn from a marge on the energy they sell. Cooperative startups, however, charge the cost price for energy and only earn money by charging a members fee. Therefore startups earn more when they have more members registered, not when they sell more energy. Through this business model, a windmill that is build will produce for the citizens primarily, not for the company, since the cooperative startup, in contrast to an incumbent, will not profit from the amount of energy sold. “That windmill needs to

be owned by the citizens themselves, it needs to work for them. This has everything to do with the company’s business model, because when you earn from the marge on the energy produced, in that case you assist that the energy comes to you instead of directly to the citizens. This is a business innovation with which the transition can be accelerated.”, stated by the Marketing

Manager of Q. This sustainable innovation is due to this aspect especially profitable for consumers, since they pay the cost price to the cooperative startups instead of the energy price plus a marge charged by incumbents.

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Influencing Factors in developing Sustainable Innovation

New Technologies. One of the factors that influence the sustainable innovation is the rise of new technologies. Examples of technologies that are gaining market share are electric driving and heat winners. This has been confirmed by the Innovation Manager and the Marketing Manager of E and Q, which capture the leftover heat in a house to reuse. Another development that is recognizable in many product innovations is that products get smart. This means that products get connected to the internet and therefore are able to ‘communicate’ with each other. A smart grid is a network of such connected smart products. This has been addressed by the Marketing manager of Q and the founder of GWL. Since those products can communicate with each other, they can define how much energy they need and what they have left at the end of their shift. This leftover energy can easily and automatically been used for other products, like the heater or an electric car. Those innovations make energy use more efficient which results in a reduction of energy waste.

Yet another innovation that contributes to the development of smart grids in household is the home battery of Tesla. This is a tool that stores the energy of house owners own sun panels during the day so that it can be used in the evening when the householders need it. Since the beginning of this year the product is available in the Netherlands, for more than 3,500 euro (Brinck, 2015). When the demand for this product will rise, economies of scale can result in a lower price, through which it will be feasible for more households. This is confirmed by the director of DEU: “Thresholds to implement the new technologies become lower and lower. More

things get financially feasible for consumers. New products arise that are technological advanced.” When customers can store their own energy, because of new technologies that get

feasible for them, and smart grid at their houses control their energy usage, energy use of consumers get much more sustainable.

Transition is too slow. The founders of EGR, DGR, GWL, EWE and the Marketing Manager of Q expressed explicitly that they engage in sustainable innovation with their startups because they feel the energy transition is going too slow in their community, or in the case of Qurrent, in the overall market. “We have founded this energy cooperative, because we think the

energy transition is going much too slow in our community”, the founder of EGR confirmed.

With their local cooperatives they want to speed up the transition, a task that the local government in their eyes fails to accomplish.

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Independency. For the founders of startups like GWL and TS and for the Marketing Manager of Q one of the reasons to establish their startups was aiming at independency. The latter describes that they did not want to be dependent of big incumbents, which generate energy for their own profit and of which some are part of an international energy company, like Essent (RWE) and Nuon (Vattenfall). “Would an international company actually invest in sustainable

generation of energy in a small town like Haarlemmermeer?”, the founder of TS asks herself.

She estimates that this change is probably really small. “Also concerning the crises in the world,

like in Russia and the Middle East, we should not be so dependent on turbulence countries.”, the

founder of TS continued. The founder of GWL makes the comparison with food as wake-up call to communities: “Why do you want to be dependent on energy companies as a community,

arrange it yourself. Make sure that your citizens generate energy together. That is the same as with food, take care of your own food, in that case you are not dependent anymore on too much or not enough import/export.”

Double Externalities

Besides the uncertainty of the success of innovations, there are two additional challenges that companies will face while engaging in sustainable innovation (Rennings, 2000).

Technology spill-over. This means that a company cannot fully profit from its new technological innovation, because others might copy the innovation, through which the company loses its first-mover competitive advantage. For this sector this is interesting to point out, because for the energy sector this is a slightly different story. Part of the sustainable innovations is the cooperative business model which prescribes that the company does not earn from the amount of energy it sells, but from the amount of members instead. Since the cooperative startups, which use this business model, operate from an idealistic perspective to reduce the energy use, they actually support other companies to take over their business model. This has been explained by the manager of Q: “There is a difference; in our case is not a problem when

other companies take over our innovation. Even when those big companies would take over the business model, we would actually support that. At the same time, this could work to the detriment of our reason for existence, but this could even mean that our task is accomplished.” In

this study the participants view technology spill-over, therefore, not as threatening.

External cost. The second aspect of the double externalities that innovative companies could face is the externality cost. Companies could put extra effort, time and money in

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convincing people about their innovation. In the energy sector this is the case when companies offer renewable energy. Consumers should get to know the story behind it before they will switch to another energy provider, although, many do not pay actual attention to where their energy comes from. This is explained by a staff member of the marketing team of Q: “Getting

new customers on board is a quite intensive process. We call it a low-interest product. Consumers have it and are not really interested in where their energy actually comes from. When it is cheap it is oke for them.” Local startups put extra effort in approaching people directly

in their neighborhood to talk about their sustainable innovation. This has been confirmed by the founders of GWL and EGR. Eneco, as an incumbent, faces this challenge as well, although in a different form. On one hand it is a big company with a known name, therefore people know what they do. On the other hand however, Eneco has to convince people that they are “not one of the bad boys” and that cost time, effort and marketing skills.

Incumbents towards Sustainable Innovation

The literature describes that incumbents have a dominant role in the energy sector and oppose the entrants of new startups (Schoor & Scholtens, 2015; Stenzel & Frenzel, 2008). This role of incumbents and their impact on the generation of sustainable innovation is researched by means of the interviews, of which ten were with startups and one with an incumbent, which is collaborating with one of the startups.

Capital and knowhow. The main characteristic of incumbents in comparison with startups is their extensive capital to invest and the knowhow from years of experience in the market. This is also what the director of DEU, remarks: “They still have much more possibilities

to get to money to put in resources, than young companies have like us.” Remarkable is that this

sentence of the director of DEU is followed by: “But they are not doing it and at one point of

time it is not needed anymore.” According to the founders of DEU, GWL, ZW and the

Marketing Manager of Q, incumbents do not stake their whole business in green energy, because this is not possible with their current business model, which will be described in the next section. The Innovation Manager of E remarks that Essent and Nuon probably do not go the same direction, “because they are a component of an international company and therefore have

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It is not the case that incumbents do not invest in renewable energy at all; Eneco, Nuon and Essent all have their green energy projects, but “they split their traditional and green

divisions”, according to the manager of ZW. An example of a renewable energy project of an

incumbent, besides Eneco, is Groene Stroom of Essent (“Groene Stroom,” n.d.). Nevertheless is it not enough according to the interviewed startups. They would like to see more commitment of the incumbents towards sustainable innovations. The actual dominance of incumbents is more related to the role of the government, which will be explained at the end of this chapter.

Restrain to engage in Sustainable Innovation

As per the traditional model incumbents will be harmed when new entrants come to the market (Hill & Rothaermel, 2003). According to this research, incumbents constrain to engage in sustainable innovation is described by means of four aspects.

Organizational Inertia. Most of the incumbents in the Dutch energy sector are companies that operate in the market since the liberalization of it in 2004. They have taken over numbers of municipal energy companies, which all together have formed extensive large companies, with a considerable internal organization. The founder of EWE explained: “Those are large-scale

companies, which employ thousands of people. Therefore they are very indolent and slipped away from the market itself.” With this remark the founder of EWE means that the incumbents is

standing much further away from the product and service delivery to the customer, while this tie is much shorter in the case of local cooperatives. According to them they can adapt to the wishes of customers much faster than an indolent incumbent can do. The Innovations Manager of Eneco confirms this by stating: “The energy world is getting smaller, less central, more decentral.

Everything becomes smaller, people can do more themselves: transparency. Soon there will be more than enough electricity, people are going to generate themselves and with that they need to be helped. It is not about the investments in big fossil power plants op Eemshaven, this is what these guys are still doing.” With this statement the Innovation Manager of Eneco says that it is

important to realize that people will generate their own energy more and more and that companies need to help them with this. What those other incumbents do however, according to the Innovation Manager of Eneco, they still have their focus on investing in big fossil power plants instead of focusing directly on consumers. Eneco shows that is possible with a big organization like Eneco’s to engage in sustainable innovation. The other incumbents, however,