The tipping point: developing an energy transition strategy

Since 2021¹, Russia’s geopolitical weaponisation of oil and gas has increased wholesale prices of electricity and gas 15-fold. Sanctions against Russia, Europe’s leading gas supplier, have left countries no choice but to diversify supplies, with LNG often the first alternative. However, the cost of LNG has more than doubled since last year. As a result, the most expensive energy source to meet demand in many European power markets is now gas. The UK has spent £60 – 70 billion over the past 12 months since February 2022 on wholesale gas, £50 - 60 billion more than in a typical year prior to the war and pandemic.²

78% of the UK’s energy comes from fossil fuels such as gas, oil, and coal, according to the BEIS department.³ Yet, international insecurity, growing climate concern and biodiversity issues have forced European countries to question their energy sources and reliance. With the Paris Agreement for a 45% reduction in carbon emission by 2030 rapidly approaching, businesses must diversify to avoid the most catastrophic effects of climate change.

There has been a promising trend of investment in renewables. Bip’s own research found that the total investment by the oil and gas sector in renewables rose to US$17 billion in 2022, almost six times the rate of 2019. This represents a 5.2% investment of CAPEX compared to 2019’s 0.7%. The agenda for International Energy Week 2023 additionally pivoted focus towards sustainability and energy supplies.

Despite the fact that diversification towards renewable sources is already occurring, the next few years remain pivotal for ensuring an environmental tipping point is not reached. As the nature of energy supply shifts, businesses and companies are central in the effort to reduce carbon emissions, whether that is weaning off expensive carbon sources and adapting to new hydrogen markets or changing their ambitions and energy outlooks.

The financial gain

Europe’s energy supply is at a crossroad and the fiscal damage of continuing our current supply chains is major. According to the CDP⁴, from 2021 to 2026, global companies face up to US$120 billion in costs from environmental risks in their supply chains. These increased costs have a contagious effect across society; higher prices pass down the chain and impact consumers too.

The world cannot afford to not invest in clean energy. Large-scale investment is an opportunity for businesses, with the future benefits outweighing upfront costs. CDP further found that the 8000+ suppliers who undertook activities to cut emissions collectively saved US$33.7 billion in the process. For G20 countries, a recent report from IRENA discovered almost two-thirds of renewable power added in 2021 had lower costs than the cheapest coal-fired options, suggesting that going solar is now cheaper than building new coal power plants.⁵

Clean energy investments additionally drive economic growth, with a potential to create 18 million jobs by 2030, according to the UN.⁶ No doubt, the economic advantages of a net zero transition are widespread with the potential to improve businesses financial gain, monetary relationships with consumers, and widen the scope for employment.

The significance of an energy transition strategy

Considering the clear benefits and current pressures, a business’ energy transition strategy is nothing but essential. Having a strategic roadmap to frame day-to-day activity is just one step in ensuring all-encompassing decisions are in line with the businesses’ energy-based values. It is important that businesses maintain an adaptable strategy as it reviews modes of production, transformation and consumption of energy.

The importance of energy has climbed new heights in the corporate agenda within the last year, pushing business executives and leaders to question their own future energy strategies. However, without explicit engagement from corporate level, future plans will be hard to implement. An energy strategy that is not successfully embedded into the organisation creates misalignment across departments and functions.

Organisations must additionally consider how these strategies collaborate with the external ecosystem. Increasing pressures on natural resources, new global conflicts and public expectations on business environmental performance are all impacting how organisations structure an energy strategy. One-size does not fit all, and these factors must be taken into account when developing an effective plan.

Diversifying energy supply

Diversification brings two main benefits. Firstly, the generation of investment opportunities in new sources and markets which allows for greater expansion in the future. The second, it creates a sense of stability as the dependency risk is reduced when a balanced mix of energy sources is utilised. For example, green energy sources such as wind, hydro and solar are dependent on seasonal variation and can be sporadic. Yet, if an organisation actively combines investments in various sources, reliance is reduced on any single technology, inherently lowering the risk.

In recent years, the use of hydrogen by industries has grown. However, gaps between investment and volume in hydrogen supply and demand has stunted the committed transition to a hydrogen economy. Yet, new technologies like hydrogen valleys are paving the way forward by providing abundant access to carbon-free energy. Hydrogen valleys are geographic areas that allow the development of a localised integrated hydrogen supply chain from production to distribution and utilisation. Multiple valleys have been launched across Europe, fostering the decarbonisation of numerous industries and a spectrum of ESG benefits.

Leverage the data

With political and corporate leaders announcing aspirations to cut emissions and launching radical energy transition plans, it is important to remain grounded and realistic with decarbonisation goals. Under pressure to commit to sustainable practises, vision statements understandably can lack backing from foundational knowledge or relevant data. Yet, taking time to collate numbers and understand the bigger picture can inform more successful clean-energy implementation and longer-term economic improvement.

Digital tools and data are available to promote organisations’ awareness of their companies’ real impact on the environment by providing digital strategies, performance analysis, CFO services and predictive analyses of energy market trends. This can then be used to define a relevant business model and identity any pain points to provide solution benchmarks. Once the data is collected, metrics can be reliably made.

Gathering accurate data on energy, gas and storage is vital. Bip, for example, use its well-structured AI solution, Transmission System Operators and Distribution System Operators (TSOs and DSOs) to forecast gas capability and delivery. This method ultimately improves core process efficiency and lowers costs by predicting the daily volume of delivered gas and identifying root causes of Unaccounted Gas Analysis, leading to better economic rewards.

Moreover, organisations typically source energy from a third party. However, a growing number of hybrid models and self-sustaining projects are being implemented. For example, AstraZenca has committed to substituting 100% of site energy consumption with renewables through on-site solar PV and off-site power purchase agreements. These new models will have their own set of implications for the business and require the necessary skills for insourcing or outsourcing. Therefore, analysing a company’s internal mechanisms and continuously reporting on processes is essential to ensure the right approach and recommendations.

Collective responsibility

Committing to lowering emissions or sourcing diversified energy sources is a core challenge and in recognition of this, businesses must be flexible and open-minded. Strategically flexible organisations commit to actions where there is certainty, often backed by datapoints and expertise, in their decisions, but they are also willing to explore alternatives when certainty cannot be guaranteed.

Often the end goal, whether it is utilising renewables or AI technology to reduce emissions, can be disrupted by departmental disconnect. Setting up a comprehensive strategy that breaks down organisational boundaries helps to set the direction for the collective and engages employees. Decisions need to be well-defined and guided by a sense of collective responsibility, which will in turn smoothen future alterations. Using a third party to support CIOs and CTOs to embrace the energy transition process and provide guidance in decisions to pivot from the plan can be beneficial here. Leaders that are comfortable in committing to the journey without a polished vision are often more capable to tackle internal and external challenges.

Taking a cohesive approach that includes all stakeholders and tailoring communications for employees, shareholders, customers and the wider community improves engagement across the board. Collaboration and dedication from all players are the key to combatting the energy crisis.

Conclusively, the world is battling against an energy and environmental crises. The pressure is on to adapt to new and greener energy sources or risk continuing eco damage, rising gas prices and wide-scale collapse. Although the transition to net zero may seem a daunting task, there are multiple routes and ways businesses can take the first step. Just considering realistic energy goals or implementing energy monitoring systems can make a change.

Written by Robin Beaman, Partner at BIP.

References

1. https://www.imf.org/en/Publications/fandd/issues/2022/12/beating-the-european-energy-crisis-Zettelmeyer
2. https://eciu.net/analysis/reports/2023/the-cost-of-gas-since-the-russian-invasion-of-ukraine
3. Gov.uk, Digest of UK Energy Statistics (DUKES): energy, DUKES 2022 Chapter 1: Energy [Date accessed 29 July 2022]
4. https://www.cdp.net/en/articles/supply-chain/environmental-supply-chain-risks-to-cost-companies-120-billion-by-2026
5. https://www.irena.org/news/pressreleases/2022/Jul/Renewable-Power-Remains-Cost-Competitive-amid-Fossil-Fuel-Crisis
6. https://news.un.org/en/story/2021/06/1094762

Read the article online at: https://www.energyglobal.com/special-reports/12052023/the-tipping-point-developing-an-energy-transition-strategy/