Strategy

Now hear this: Deryk King, CEO, Direct Energy

The Direct Energy CEO on climate change and what business can do to meet the new reality.

Climate change should be near the top of everyone’s agenda, but it’s all too tempting for corporate Canada to do nothing while our governments try to get their acts together. Deryk King, CEO of Direct Energy, believes business should be actively involved in shaping carbon policies. Andy Holloway caught up with King to discuss why industry should care.

“There’s nothing wrong with using energy. It underpins modern civilization and our way of life. But using it responsibly and cost-effectively makes sense, especially when it’s a limited resource. We do have to start now but we can start in an incremental way, so that when we look back 20 years from now we’ll say, “Gee, we started off in a very small way, but look at what we achieved.”

To a certain extent, there’s self-interest here. There’s always self-interest and, in my view, rather than have a crisis dumped on us in 10, 20, 50 years, we would rather deal with this incrementally and make a start right now. I’m not at the bleeding edge of climate-change theory. I’m not a Jeremiah who says disaster is going to befall us if we don’t stop using energy right now.

But climate change aside, and this makes complete sense, the first thing businesses should do is understand their carbon footprint. They should understand how, where and to what extent they use energy, be it oil, natural gas or electricity. You don’t have to think about carbon emissions. This is an economic equation: Can I reduce my use of those consumables, which have all doubled in price by and large — at least oil and gas have — and how can I do that? You start with very simple things like low- or zero-cost reductions in consumption: making sure your windows don’t leak, making sure the heating isn’t on overnight, really simple things. Then you can graduate to more efficient equipment: new air conditioners, new chillers, new furnaces, better insulation. All of which have pretty good paybacks and all of which make absolute economic sense for a business.

If you want to really think about climate change and carbon, you can think about changing the way you operate to be low carbon. That might mean shutting down a furnace and putting solar panels on the roof. The economic case for that tends to be a little more challenging than insulation or state-of-the-art cooling equipment. Some companies — Wal-Mart comes to mind — see enormous brand value in reducing their carbon footprints and positioning themselves as environmentally responsible companies. But it doesn’t work for everyone.

That can all be done without any government regulation or legislation, but it’s not enough. We should encourage government interventions in the form of regulation to deal with this as well. That can come in lots of different ways and be really simple, like revising insulation standards for new housing. That’s been a big plus in the U.K. You can extend that logic to automobiles, and while the automobile lobby hates me for saying this, it’s absolutely shocking the lack of gasoline fuel efficiency standards in the automobile industry. The Detroit lobby has successfully lobbied against those standards and has circumvented what legislation does exist with SUVs and trucks, which has come back to bite them in a huge way. But I try not to be too critical of politicians, because there’s very little popularity in saying regulation should increase, new rules will be imposed and prices will go up. Gordon Campbell in B.C. has got it right: let’s make a start, test it and see how it goes.

The trouble with Canada is that it has baggage: the National Energy Program. People still talk about that quite emotionally, and you’ve got that same antipathy toward any so-called national plan, which the resource-rich provinces just see as someone trying to steal their resources. You’ve got this patchwork quilt of regulation. The good news is that all the provinces are doing something. The bad news is that they’re at odds with one another and the feds. In Ottawa, the Tories and the Liberals are at odds, and the NDP is somewhere else. It’s quite dispiriting. I think the chances of getting back to a national policy are slim to zero. The best we can hope for is some kind of joined-up thinking. What I’d like to do is put the provincial premiers and the prime minister, and Stéphane Dion, if he wants, in a room and not let them out until they agree. It doesn’t have to be a single policy, but it has to be joined up and coherent so that what Alberta is doing is not completely at odds with what Quebec is doing.

We also need a level playing field with the world. We cannot disadvantage Canadian industry. We have to argue for some sort of consistency across the globe, and if we can’t get that consistency, then we have to take measures to protect the Canadian economy, Canadian business and the Canadian standard of living. If goods come in from, say China, and China has not signed on to environmental action, at the point of import we tax the CO2 component of whatever we’re bringing in. Intellectually, that could work, but, practically, you threaten world trade and, secondly, you’d need an army of bureaucrats to put that legislation in place and deal with the consequences. That kind of thinking could also bite us. If the U.S. applies that sort of thinking to the oilsands, we’re screwed in terms of sending that oil down into the U.S. where it’s badly needed.

There’s another side to this as well, and that’s what I call the moral dimension. The moral dimension says that the richest countries in the world are going to have to take the lead and show the way. If we insist on China, India and other polluting nations be right on the ball and fully compliant on Day 1, we’re not going to make it. What they have to do is sign up to some sort of plan that incrementally gets them to accept their responsibilities and over time implement measures to deal with it. If we start today, then by the time we get to 2025 or 2050 or 2070, these measures will be fully effected and China will be fully integrated. It can be done remarkably quickly. In a generation a nation can change itself, but it’s a real challenge for a nation the size of China.

But China also has this frantically entrepreneurial culture and in my more optimistic moments I see China as part of the solution, not the problem. Let’s take coal-fired power generation. They’re building one new coal-fired power station a week, and they’re dirty coal plants — they’re not actually dirty, but they have a high CO2 content. Let’s suppose China gets the bit between its teeth on clean coal technology and carbon sequestration. Which country in the world could get up the learning curve the quickest? Probably the country that’s building one power plant a week.

Now, I would never want to pick a winner in power generation. It’s going to be a bit of everything, and that’s our company’s strategy. Almost all our power capacity is gas-fired, but we do have some renewables. We intend to move forward on a more balanced slate of nuclear, wind, gas, possibly clean coal, but not conventional coal. Nuclear has turned the corner. Nuclear power is a risk because of the terrorism threat, but it’s an essential component of our future energy supply. For nuclear power, you need space, you need water and you need uranium, and Canada has got more of those things than pretty much anyone else.

But the private sector should take the risk of doing this. Private-sector shareholders have to take the risk, not the taxpayers, because you just know what will happen. It’s $60 million before you put in a spade, but you have to admire what Duncan Hawthorne has done at Bruce Power. They’ve brought that power station back from the dead and that’s what private industry can do. In Alberta, which I think has a moratorium of building any new nuclear power stations, the oilsands burn one unit of natural gas in energy terms for every 1.5 to two units of oil produced. That cannot make sense. If you need sources of heat up there, nuclear power is the answer.

You have to capture the imagination of the public with a marketing proposition that resonates and I don’t think anybody’s been able to do that yet. Our efforts have been focused on more conventional efforts. If you want to buy green power or carbon-neutral gas, you can buy those products. If I wanted, I could put in a remote thermostat that I could run from my BlackBerry and I could turn my heating or cooling on one hour before I go home, or put the stove on to cook my dinner. Finding the marketing proposition that attracts people to do that has proved very elusive. We’re at the early adopter stage, but it’s not become mainstream.

One of the reasons it hasn’t become mainstream in Ontario is that electricity in this province is subsidized. If you are only paying 4¢ per kw/h, why bother switching the lights off? If it was 20¢, that might be a different proposition. Proper pricing of energy is something of a hobbyhorse of mine. You have to price it economically and then people will use it more responsibly. In Alberta, natural gas rebates are given to everybody. Frankly, I’m fortunate. I don’t need my gas to be rebated or my electricity to be subsidized. I’d rather pay lower taxes and pay for what I use, but I recognize not everybody is in my situation. I’m a strong advocate of economic pricing of energy, but I’m also a strong advocate of protecting the weak and the poor from the consequences of that. We put a lot of effort in the U.K. into protecting our disadvantaged customers and we do the same in North America.

What should government do? Apart from standards and regulations, they can tax people. B.C. has a carbon tax. That will have no impact on consumers’ behaviour today, but I think it will in five years’ time when it’s ramped up. My worry is that people will get used to it along the way and just cut back on something else. It’s an interesting experiment.

For the big players, we’re strong advocates of cap and trade. How much is Gordon Campbell’s tax going to reduce CO2 emissions in B.C.? We just don’t know. With a cap-and-trade system, you cap the CO2 emissions so you get a result and the market is the mechanism by which that is achieved, which, as a private-sector guy, you’d expect me to argue for. I hope we will see in two or three years time a cap-and-trade system and Canada and the U.S. will be trading across the boundary, and then that will link up with the European trading scheme and, ultimately, you’ve got the foundation for a global trading scheme.

The big issue is that when you trade permits to emit CO2 , do they have value? Are you just funding some scam in Russia or Tahiti or somewhere else? That’s the biggest threat to cap and trade. We trade permits to provide our carbon-neutral gas. From the second half of this year we will have our trades audited by PricewaterhouseCoopers so that if a customer says, “Oh, this is just a scam,” we can say these have been audited by one of the world’s leading firms. But some of the trading structures are not fully developed. That’s not an argument for not doing it, but it is an argument for making sure these schemes are valid and honest.

It’s not been easy for our company here or in the U.K., because this will hurt us in the short term. People ask us why do you do it? And the answer is that it’s something about this being the right thing to do and there are some things that transcend your narrow short-term interests. We do see opportunities in this as well. We’re altruistic, but not foolishly so. We just recognize that the world is going to change, we’re at that moment in history when things are going to change and you have to embrace the change or you can’t do business.”