Business and the Energy Transition
Crucial Conditions for Change
This point of view provides an overview of the relevance and imperativeness of innovation by businesses, and how this is becoming more urgent in light of the “license to operate”. The emphasis will be on the role of business in the energy transition.
Anne Huibrechtse - 16 April 2018
Climate change is one of the most severe challenges the world is currently facing. One that requires urgent action by all actors in society. Sustainability is being recognized in nearly every aspect of society, fueled by increasing awareness and societal and governmental demand for action. According to previous Deloitte research, sustainability is one of the top three risks for corporate leadership.
One recurring and essential concept is the energy transition. Both public and private parties are heavily involved in effecting an energy transition, aiming to decarbonize the energy sector and to change existing logistics and governance structures away from fossil fuels. Business participation in this process is not just welcomed, it is necessary. The energy transition is more than a shift from fossil to renewable sources of energy. It is about changing the systems of production, ownership and value creation. Therefore, we need a system change towards a new economy, based on collaboration, cultural changes as well as changing revenue and financial models, regulation and innovative technology. But how do we get there? And what role can your organization play?
Global energy consumption has been rising steadily over the years and is expected to keep doing so. If it keeps increasing at the current pace, the global natural resources are not sufficient to support and sustain the growth in wealth and population. Moreover, energy demand is integrally linked with greenhouse gas emissions, facilitating climate change – which can no longer be ignored. Not by governments, not by business, not by society. As a result of the increased attention for climate change and sustainability, many businesses are, with varying results, looking for means to include necessary sustainable elements into their strategy. An energy transition from fossil fuels to renewable energy sources could seriously help to mitigate climate-related problems.
The principles of the circular economy (see also the paragraph “Building Blocks” in this point of view) can facilitate the system change, also for energy transition. The linear “take, make, dispose” production model will no longer suffice - significant action is needed to make the economy circular and increase energy and resource efficiency.
A New Approach
Energy transition requires technological, social and financial changes. For instance, the use of smart technologies and new forms of collaborations in which local communities are as vital as global interaction. Also, new approaches towards regulation and funding are needed to encourage investments in organizations that are currently underfunded, usually due to communication issues between investor and investee regarding risks, rewards and businesses cases – e.g. regulation and financing are not designed for shared ownership. The different elements of the necessary innovations are discussed below.
1. Technological Innovation
When talking about energy transition, it usually focusses on new technologies. We know by now that most of the technology for energy transition is already out there and available. To get it into practice is now the biggest challenge. An interesting example is the use of old infrastructure in the North Sea for new purposes. The old, abandoned oil and gas platforms in the North Sea are now being used to convert wind energy into hydrogen. Not only is this concept a great design from the perspective of the circular economy, but it is also a financially well-arranged and relatively easy way to support the energy transition. The new application is a great example of technological innovation, even when using existing infrastructure.
2. Social Innovation
The largest step is a new mindset. Research shows that the greatest barrier to overcome is cultural, not technological. It takes time and effort to change current patterns and to adapt to the idea of renewable resources. Even when it has been shown that renewable energy is cost efficient and technologically enabled, it is hard to say goodbye to proven steady energy sources and to switch to new ones - usually due to resistance to change on an organizational level. Also, the proven track record for going from a nationwide electricity supply system to a local hybrid infrastructure is still too insubstantial to convince municipalities and other communities to fully commit to change.
Start ups and multinationals, private and public actors, all have their role in the play we call system change. For example the shift from an integral grid to more local energy hubs where demand and supply are matched, can be facilitated by new technologies of start ups in combination with a multinational plant and a local utility provider. In our current system we’re so used by the power of the scales, that it takes time to adjust to the advantages of smaller set up’s. The eco-systems of start ups and smaller companies can now be very interesting to turn to when building new energy models. It will ask a cultural change for large companies not to immediately take over the smaller ones, but collaborate as equal partners.
When the agile networks of the startups are combined with the stable infrastructure of the established parties, acceleration of transition takes place.
3. Financial Innovation
One of the main barriers is also one of the biggest accelerators: agile financing. Financing is based on an estimated return on proven historic business cases. As described above, there is no proven history, since energy transition takes place in a system change from old to new. How to create a financing framework which can leverage the innovation with return? Looking at the disruptors in the schedule above, blockchain and cryptocurrencies can be methods to create stacked financing frameworks in which investment funds, private equity and even government funding are combined to facilitate ecosystems development to apply for funding. To create a timing difference in return. For commercial parties to oversee the short term investment and investment funds to have stable return in the long run.
Building blocks to facilitate to these changes can be found in the concepts of circular economy and redefining the system of regulation.
The Circular Economy
The circular economy is based on four principles: reducing, reusing, recycling and recovering materials and energy. It is a regenerative system in which resource input and waste, emissions and energy leakages are minimized by closing the loop. It lays the basis of a system change in which no new resources are needed to create energy.
|1||REDUCE||Rethinking, redesigning (including prolonging the lifespan of products), minimization, reduction, prevention of resource use and/or preserving of natural capital|
|2||REUSE||Reusing (excluding waste), closing the loop, cycling, repairing and/or refurbishing of resources|
|3||RECYCLE||Remanufacturing, recycling and/or reuse of waste|
|4||RECOVER||Incineration of materials with energy recovery|
However, we are still a long way from actual energy reduction and a serious shift to renewable sources. Despite efforts to halt energy consumption, global energy demand has been increasing over the years and will be growing with an extra 48% by 2040. As increasing energy demand is integrally associated with higher CO2 emissions through fossil fuels, a business-as-usual scenario will not be sufficient. An acceleration of the energy transition requires a greater effort: a complete system change. Incremental changes are simply not enough. In the words of Albert Einstein: ‘We cannot solve our problems with the same thinking we used when we created them’. The principles of the circular economy support the steps of change.
The challenge for the future will be to keep in mind that already in the design stage facilities must be built in to use it for (yet unknown) future applications. Agility and flexibility will be the greatest powers to boost circular economy system change. For now working with the concepts of recover, recycle, reuse and reduce
As mentioned before, collaborating in ecosystems in which all parties are equally important is a crucial factor for the circular economy. Ecosystems are not just networks of organizations. In the natural world, ecosystems consist of localized communities of living organisms who interact with each other and their particular environment of air, water, mineral soil, and other elements. These organisms influence each other and their terrain. They compete and collaborate, share and create resources, and coevolve; and they are inevitably subject to external disruptions to which they adapt together. Investing more effort and resources in similar ecosystems in our economy is likely to facilitate and accelerate the energy transition and change in general. This is particularly important in our era, with technology evolving at such a high pace. Power comes from niche firms that enter markets in smaller ecosystems and become designers.
In general, it takes years for regulation to catch up with new (technological) developments. For instance, when many public services were privatized in the Netherlands in the nineties, regulation was adapted slowly. Eventually this resulted in fair prices for users on mail, shipping and energy supply. This was all arranged in a clear governance system with a regulator (Autoriteit Consument & Markt, or ACM). Over the years, the situation has changed, but price calculation is still bound by the rules that were made more than 20 years ago. Another example is the solvency regulation which is an obstacle for banks aiming to invest in long term return projects. In a world with so many technological disruptions, regulation should be able to follow new developments quickly. This is not an easy task - if it was, it would have been done already. But it is clear that the regulator is also part of the ecosystem and in need of a system change. The sooner we are able to make regulation more agile, the better.
The next step: preparing for the unknown
Will all the things we take for granted now still be relevant in the future? Will electric cars be the new normal, or will hydrogen-fueled cars take over? Regardless, the ability to adapt quickly is essential.
Transitions usually take place within defined boundaries. Within these boundaries, a transition journey is set out in which old sources are replaced over time with new ones, which transform companies into new stages. However, for energy transition the boundaries are not as clear. An organization needs to prepare for unknown risks and unknown opportunities. The system is changing. It requires courage, vision but especially a can-do mentality because every change starts with the first step.
At Deloitte, we recognize that we are in the middle of a system change. While visualizing the future by analyzing trends, we are able to facilitate pioneers, first movers or quick followers in their steps in the energy transition. Are you ready to move forward with your next step?
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Do you want to know more on Energietransitie? Please contact Anne Huibrechtse at +31 88 288 8466