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29 Jun 2021

'There is no energy transition without creation of value'

'There is no energy transition without creation of value'
To us, a just transition means creating the right balance amongst, and value for, the stakeholders to deliver a net zero economy.

The Romans – who knew a few things about technology advancement – used to say in medio stat virtus: virtue stands in the middle. This principle is something we’ve always applied in life and it infuses all of our work at the net zero bankability consultancy, Ikigai Capital.

We believe that balancing multiple virtues, finding compromises (or better yet, win-wins) between the four main stakeholders in the energy transition – consumers, technological innovators, financial institutions and governments – is the only way we can achieve our sustainability objectives.

What does this actually mean in practice? For example, notwithstanding huge social (and now legal) pressure, it would be quite naïve to think that large oil and gas companies can divest from billions of investment just because we have to decarbonise.

Besides the fact that shareholders expect to have their investment remunerated, millions of people are employed in the industry and all our economies still depend heavily on fossil fuels for materials, industry and transportation.


This article was originally published on The Guide - Season 3 | 2021

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Transition implies change, radical change in this case, and radical change cannot happen overnight, nor can it leave economic disparities or insecurity.

We need to move billions of dollars from a fossil fuel-driven economy to the future green economy. To do so, we need to show social value and convenience, deliver industrial competitiveness and productivity, and improve profitability equal to or in excess of the traditional energy sector.

We also need to consider that large fossil fuel producers do not operate on an island; they operate in an ecosystem that depends on them, with large financial interests at stake. If we want to deliver a just transition, we need to consider the ecosystem as a whole and take a systems approach to stakeholders and infrastructure delivery.

The same concept applies to the demand side of emissions reduction, which, in our opinion, has been comparatively neglected.

According to BNEF, 97 per cent of vehicles still run on fossil fuel, and this proportion will only reduce to 42 per cent by 2040. Transport and heavy industry is responsible for more than 45 per cent of global CO2 emissions.

This is because demand decarbonisation is in many ways more challenging and complex than energy supply decarbonisation. The so-called ‘hard to abate sectors’ like the heavy manufacturing industry such as cement, steel and glass, or transportation like aviation, shipping and heavy goods transport, struggle with inadequate commercialised technology for specific applications, high upfront capital costs and balance sheet constraints, weak international regulation and carbon price signals.

In our experience, a limiting factor is also insufficient coordination across industry, finance and government with respect to geographical cluster-based decarbonisation solutions, although Ikigai has been fortunate to be involved in some of the leading projects in the UK in this respect.

It is critical to understand the environment around solutions, manage and align stakeholder interests, while creating valuable and sustainable implementation.

Addressing the energy trilemma is our starting point when decarbonising the demand side: what is important for our customers in terms of affordability, sustainability and security of supply? It would be foolish of us to think that we can deliver the energy transition by asking businesses to pay for it, especially in a post-COVID scenario where budgets are tight and focused on core business; we all know that energy is critical but not core to large energy users.

All post-COVID recovery plans across Europe hinge on local variations on the theme of ‘build back better’ or ‘catalysing the green recovery’. We have a great opportunity to advance the energy transition and foster regional development, while emphasising local manufacturing and supporting the creation of national champion technologies and platforms through commercial scale demonstration of that technology.

In order to deliver a just and sustainable transition in a post-COVID scenario, value creation for stakeholders needs to be at core of every investment plan, with governments supporting the transition with joint regulations across geographies to make sure competitiveness is guaranteed to those that are working hard towards decarbonising their operations.

Regulators need to ensure that green wealth is fairly distributed to industrial heartlands across Europe, rather than industrial clusters being regulated and burdened in such a way that results in job losses and makes the areas less attractive for capital investment.

We also believe that net zero can be achieved in parallel with sustainable economic growth with recovery supported by large-scale private investment in energy and transport projects (in front and behind the meter), rather than exclusively by fiscal stimulation.

To attract large scale private investment, we need to focus on creation of value and long-term stable cash flow, risk mitigation and appropriate allocation while working together on a systems- basis (ditch that island mode!) in key areas of European excellence.

When we create green solutions for energy intensive consumers financeable off-balance sheet by lower cost capital, we improve industrial profitability and competitiveness.

Financial institutions have a role in creating innovative financial products for corporates, industrial zones and cities to support capital investment in early stage development and construction, while technology providers consider bankability and future proofing for multiple markets in design, and governments set out achievable targets, tax incentives and revenue support for innovative solutions and enabling infrastructure, remove disincentives to decarbonisation on certain fuels and behaviours, and create the conditions for a strong, stable and technology-neutral carbon price.

Ultimately, energy users have a responsibility to challenge the way in which they use energy (and better understand that use through metering and sensors) and to engage with local stakeholders on cluster-led systems solutions which optimise value and minimise project-on-project risk.

We have a once-in-a-history opportunity to not only shape the future of the energy sector, but also accelerate the green recovery, provided that we remember there is no energy transition without creation of value.

 

About the authors: Helena Anderson is co-founder and COO of Ikigai Group and Roberto Castiglioni is her fellow co-founder and CEO

 

Enlit Europe Virtual KeynoteRelated content

 

Find out what Ikigai’s Roberto Castigioni has to say on the question, What if the global pandemic accelerated the green transition? 

 

Watch on demand

 


This article was originally published on The Guide - Season 3 | 2021

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