Business and the Energy Transition
Crucial Conditions for Change
Focussing on the role of business in the energy transition, this point of view breaks down the importance and necessity of innovation in the business world.
Anne Huibrechtse - 16 April 2018
Climate change is one of the most significant challenges the world is currently facing – one that requires urgent action by everyone. Sustainability is now gaining recognition in nearly every aspect of life, fuelled by increasing awareness and societal and governmental demand for action. Previous Deloitte research also finds that sustainability is one of the top three risks for corporate leadership.
A recurring, central concept in this discussion is the energy transition. Public and private parties are now deeply involved in achieving such an energy transition, aimed at decarbonising the energy sector and moving existing logistics and governance structures away from fossil fuels.
Business participation in this process is not only welcome, but also necessary. The energy transition is more than a shift from fossil fuels to renewable energy sources. It is about changing systems of production, ownership and value creation. It will require a systemic shift towards a new economy, based on collaboration, cultural changes as well as evolving 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 risen steadily over the years and is expected to keep doing so. If it keeps increasing at its current pace, global natural resources will eventually be insufficient to support and sustain the growth in wealth and population. To make things worse, energy demand is fundamentally linked to greenhouse gas emissions which drive climate change – a problem that can no longer be ignored by governments, the business world or society.
Due to growing awareness of climate change and sustainability, many businesses have begun exploring ways of including sustainability in their business strategies, some more successfully than others. Transitioning from fossil fuels to renewable energies could seriously help to mitigate problems associated with climate change.
The principles of the circular economy (see the paragraph ‘Building Blocks’ in this point of view) can facilitate systemic change towards an energy transition. The linear ‘take, make, dispose’ production model will no longer suffice. Therefore, significant action is needed to make the economy circular and increase energy and resource efficiency.
A New Approach
The energy transition requires technological, social and financial changes; for example, the use of smart technologies or new forms of collaborating in which local communities are as vital as global interaction. It will also require new approaches to regulation and funding that encourage investing in organizations that are currently underfunded. Such underfunding is usually the result of miscommunications between investors and investees regarding risks, rewards and businesses cases (i.e. regulation and financing are not designed for shared ownership). Various aspects of the necessary innovations are discussed below.
1. Technological Innovation
Discussions of the energy transition often focus on new technologies. We know by now that most of the necessary technologies already exist. However, putting them into practice is now the primary challenge.
One example is the repurposing of old infrastructure in the North Sea. Abandoned maritime oil and gas platforms there are now being used to convert wind energy into hydrogen. This initiative aligns well with the notion of a circular economy, while also serving as a financially sound and relatively straightforward means of supporting the energy transition. The new application is a prime example of technological innovation, even though it uses 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 adapt to the idea of renewable resources. Even when renewable energies have been proven cost-effective and technologically feasible, it is hard for many to say goodbye to familiar energy sources and switch to new ones – usually due to resistance to change on the organisational level. Also, the track record for switching 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.
Startups 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 from startups working in partnership with a multinational plant and a local utility provider.
In our current system, we are so used to the power of scales that it takes time to adjust to the advantages of smaller setups. The ecosystems of startups and smaller companies are now an interesting alternative to explore when building new energy models. It will require a cultural change for large companies not to immediately take over the smaller ones but instead to collaborate as equal partners. When the agile networks of startups combine with the stable infrastructure of established parties, the result is an acceleration in the energy transition.
3. Financial Innovation
One of the transition’s main barriers is also one of its greatest accelerators: agile financing. Financing is based on an estimated return on proven historic business cases. However, the energy transition lacks a proven history, since it coincides with a system change from old to new. How can the business world create a financing framework that can leverage the innovation with return? Blockchain and cryptocurrencies may present effective methods for creating stacked financing frameworks in which investment funds, private equity and even government funding combine to facilitate ecosystems for developers to apply for funding and create a timing difference in return. This could also enable commercial parties to oversee short-term investments and investment funds to achieve stable returns in the long run.
Building blocks for change 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 minimised by closing the loop. It lays the groundwork for a system change in which no new resources are needed to create energy.
|1||REDUCE||Rethinking, redesigning (including prolonging the lifespan of products), minimisation, reduction, prevention of resource use and/or preserving of natural capital
|2||REUSE||Reusing (excluding waste), closing the loop, cycling, repairing and/or refurbishing 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 substantive shift to renewable sources. Despite efforts to halt energy consumption, global energy demand has continued to increase over the years and will grow by another 48% by 2040. As increasing energy demand is inherently linked to higher CO2 emissions through fossil fuels, a business-as-usual scenario will not suffice.
Accelerating the energy transition requires 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 challenge for the future will be to design facilities to foresee future (still unknown) applications. Agility and flexibility will be the greatest forces for boosting system change towards a circular economy. For now, the focus must be on the concepts of recover, recycle, reuse and reduce.
It usually takes years for regulators to catch up with new (technological) developments. For instance, when many public services were privatized in the Netherlands in the 1990s, regulators were slow to adapt. Eventually, this resulted in fair prices for mail and energy services. This was all arranged under a clear system of governance overseen by a regulator (Autoriteit Consument & Markt, or ACM). Over the years, market conditions have changed, but price calculation is still bound by rules enacted over 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, regulators should be able to follow new developments quickly. Yet, it is not easy to keep up with the pace of change. It is clear that regulators are part of the ecosystem and also overdue for system change. The sooner we make regulation more agile, the better.
The next step: preparing for the unknown
Will everything we now take for granted still be relevant in the future? Will electric cars be the new normal, or will hydrogen-fuelled vehicles take over? In any case, the ability to adapt quickly is essential.
Transitions usually take place within defined boundaries. Within these boundaries, old systems are replaced over time with new ones, shifting companies into new stages. However, for the 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 midst of a system change. While visualizing the future by analysing trends, we facilitate pioneers, first movers or quick followers in their steps towards 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