The race to deep decarbonization: Episode 2

NARRATOR  Hello and welcome to this special episode of DNV’s Talks Energy podcast. Five years ago at the 21st conference of the parties, or COP21, as it’s more commonly known, 196 countries adopted the Paris Agreement, a legally binding international treaty, which aims to tackle climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C by 2050. In this two part documentary, we will explore the topic of deep decarbonization, an urgent and complex challenge that requires difficult decisions and actionable plans. We’ll assess the technology, policy, and investment challenges we must overcome, and the actions still required, if the ambitious goals of the Paris Agreement are to be met and a green energy future is achieved. We speak to world leading experts from across the industry, who understand the key enablers for deep decarbonization and ultimately provide in-depth actionable insight for businesses looking to phase out carbon intensive fuels in favour of clean energy. We hope you enjoy the episode.

In episode one of this two-part documentary, we explored the meaning of deep decarbonization, the notion that we can move towards a zero carbon world more quickly by rapidly adopting and investing in deployment of existing and new technologies and phasing out carbon intensive practices. We heard from those at the heart of the energy transition, including those developing and deploying key technologies, that while there are reasons to be optimistic, meeting Paris Agreement goals is far from a certainty and significant barriers remain. In this second and concluding episode, we take a look at two crucial factors in accelerating the energy transition. We’ll examine the role of policy and regulation in providing a framework and incentives for rapid change. But first, we explore the key component that nothing is possible without, finance and investment.

PETER DURANTE  My name’s Peter Durante. I’m the Head of Technology and Innovation within Macquarie Asset Management.

NARRATOR  Macquarie is a global investment bank, which manages one of the world’s largest portfolios in renewable energy development. Its business model is helping to accelerate adoption of clean energy projects.

PETER DURANTE  My team’s role is, for lack of a better expression, an in-house thinktank that looks at technologies. We look at something like 120 or 130 technologies that are both here today and emerging in the future to understand what their impacts, both positive and negative, will be on the things that we currently invest in already and the things that we will invest in in the future.

NARRATOR  At the frontline of investment in decarbonization, Peter is in a unique position to offer insight into how those funding the energy transition see the challenge and opportunities. Peter told us more about his company’s approach to investment and development, and why he thinks a lot of the answers to decarbonization already exist.

PETER DURANTE  People heard me say, our investors and other heard me say that a lot, that we look at evolution versus disruption versus revolution. The most overused words in business English, I think, are disruption and revolution. And there are crucial things like smartphones and the worldwide web, those were disruptive and revolutionary technological developments. But the incredible cost reductions we’ve seen in solar in my lifetime of over 99%, and roughly 90% a decade, or electric vehicle batteries, 85% in the last decade, offshore, onshore wind, you name it, these have all really been driven by deployment and what’s called Wright’s Law in economics, the learning curve effect. So, small incremental improvements in technology year, after year, after year. They’re not based on breakthroughs. They’re based on compounding incremental improvements. It’s one of the reasons that we focus so much on deployment. And the other is that we think about positive feedback loops. So, between clean energy production, such as renewables, clean energy transport, such as battery electric vehicles, these become catalysts that feed on each other.

NARRATOR  We’ll hear more from Peter throughout this episode. But he highlights here a framework for investment in the energy transition, which is fundamental to rapid delivery, exploiting and expanding existing technologies, while supporting new technological development to make fresh gains. This, he says, creates a virtuous cycle that enables greater uptake over time. Others agree that a dual focus on investment in both existing and new technologies is needed.

YALDA LOUBOUTIN  There is not really one single answer for decarbonization. I think it’s a combination of both. The answer will be based on existing energy systems in different countries and depends a lot on the geography, and also, on existing know-how and existing skillsets.

NARRATOR  That’s Yalda Louboutin, Global Key Account Director at DNV. Her roles sees her provide strategic input for a range of customers, including investors and financial institutions, mainly focused on renewables advisory.

YALDA LOUBOUTIN  There’s a lot of investment in producing assets, for example, CAPEX on solar energy and offshore wind. But also, there is a huge amount of investment in energy efficiency. Hydrogen is a massive part of it, carbon capture storage, particularly in the UK and the North Sea. And investment in the emerging technologies is essential. Knowing how to actually manage the electricity system or how to decarbonize the hard to decarbonize systems, such as steel, cement, air transport, etc., is also another area, in which we see huge investment will be focusing.

NARRATOR  Yalda touches here on one of the crucial aspects of deep decarbonization, that to achieve zero carbon targets, new solutions and major investment will be required in areas where progress has been slower or where new gains must be made to rapidly accelerate cleaner technologies.

One of the major areas requiring attention is domestic heating. While renewable energy is making major headway in powering homes, further action is needed, as Yalda explains in the context of the UK specifically.

YALDA LOUBOUTIN  The reality is, for example, we have 22 million homes in the UK that use gas for their central heating systems, and that produces 16% of the UK’s emissions. If we want to get to net zero in 2050, all of the heating systems have to be replaced, either by hydrogen or by heat pumps. Whatever options we choose to replace the existing gas boilers, if we don’t start until 2025, that is about one million homes every year, nearly 20,000 homes a week to be converted.

NARRATOR  Hydrogen, one of the examples provided by Yalda as a means of heat delivery, is an area of major focus in the drive for deep decarbonization. Along with battery storage technologies, which enable the efficient use of renewable energy to power homes, businesses, and vehicles, the two are attracting major investment, but more still needs to be done. Back to Macquarie’s Peter Durante.

PETER DURANTE  There’s a few projects I’m working on around the world. Some, I can give specifics on, some, I’ll talk in generalities, but you can get an idea of the sorts of deep decarbonization areas that we’re working on. So, one within our part of the business in Macquarie Asset Management is on the hydrogen with one of our portfolio companies, which is Cadent Gas in the UK, which is a natural gas distribution system for most of England. And Cadent is doing a lot of work themselves and with industry on repurposing existing assets and how planned upgrades to the lines can enable higher penetrations of hydrogen, eventually, up to 100% of low carbon hydrogen into the lines. So, that includes everything from safety standards, not just for the pipes themselves, but also, industry partners and governments on end use standards and pilots for things like boilers, and home appliances, and industrial applications.

NARRATOR  It’s not just the distribution of hydrogen that is an investment focus for Macquarie, but how it can be deployed alongside other technologies to support deep decarbonization.

PETER DURANTE  We’re looking at a really heavy freight side, whether that’s inter-city buses and heavy goods vehicles, so think port trucks and long haul trucking, with hydrogen and batteries, and also, ships are looking at things like hydrogen for short haul shipping and clean ammonia for long haul ships, sustainable aviation fuels, and other projects where we’re working on carbon capture and storage on the industrial side of things. So, all of these, again, are being baked into our long-term ownership plans as a long-term investor in infrastructure that we are, but also, the other parts of Macquarie are working with their clients on and with their own balance sheet, finding these opportunities that go that much further beyond the renewable stuff, and battery storage, and the likes that we currently do at great scale already.

NARRATOR  So, where else is Peter seeing investment made that addresses those harder to reach areas within the decarbonization drive?

PETER DURANTE  Agriculture is an interesting one for us. We’re working a lot on the reduction of fossil fuel inputs through our agricultural funds in Australia and Brazil through what’s called precision agriculture. So, how do you effectively, through the use of lots of sensing and data, and frankly, quite sophisticated technology, how do you massively minimize the amount of fossil fuel inputs you need in the first instance, as well as water? Also, looking at things like alternative feed for cattle to reduce methane emissions using what’s called Asparagopsis. It’s a type of seaweed that when added to the cattle feed, can have a drastic reduction in methane from the cattle themselves. And then also, looking at different agricultural practices to measure and expand sequestration of carbon into the soils themselves, so no till agriculture and doing a lot of work with the Clean Energy Finance Corp, which is one of our cornerstone investors in our agricultural funds in Australia, to think about how do you reduce the greenhouse gas and broader environmental impacts of industrial scale farming.

NARRATOR  It’s clear that the investment landscape is hugely varied, however, significant funding is needed across a multitude of areas, in order to meet climate goals. Although renewable technologies are an attractive proposition for investors, securing the necessary finance to achieve deep decarbonization will be no easy task. A number of challenges remain to be overcome, as Yalda concludes.

YALDA LOUBOUTIN  Certainly, more investment than the current level is required. There are big investments required in EV charging of infrastructure and renewable generations wind, solar, and electrolysers. Although we expect that the operating expenditure for such a new energy system will be a lot lower than current fossil fuel infrastructures, but certainly, these require a much higher level of capital investment. There is no underfunding in terms of managing the energy system today, but in terms of reaching net zero goal, there’s a lot of underfunding. I will say raising investment funds, generally, is not an issue. The right policies are required to generate good investible projects in the right quality and capacity. We can look at the data that was provided by our IEA report, and I think the 2020 report shows the investment in 2019, about US$1.5 billion in fossil fuels, whilst 4.5 billion was invested in energy efficiency, 3.3 billion in renewables, and around 1.5 on projects, such as hydrogen, CCS, etc.

NARRATOR  While Yalda highlights the fact that necessary funding to meet today’s energy needs does exist, simply having capital available to support the projects isn’t enough.

RACHEL RUFFLE  There’s no shortage of investments. There’s a wall of capital wanting to invest in green technology. You know, we don’t have enough projects to sell our customers, so it feels like the availability of renewable energy projects is the bottleneck for the transition.

NARRATOR  That’s Rachel Ruffle, CEO for Northern Europe at RES, one of the world’s leading renewable energy developers. RES is at the interface between capital investment and project delivery. So, what does Rachel think the solution to the funding challenge is?

RACHEL RUFFLE  Investment does needs stable policy landscape, in order to thrive and in order to reduce the cost of that capital. So, investors require a lower return when they can see long-term stable revenues coming through.

NARRATOR  What Rachel clearly highlights is the clear link between investment, policy, and regulation. Without clear and unambiguous policy, investors don’t have the degree of certainty and visibility needed in order to commit. Katy Briggs, Strategy Lead at DNV, talked to us more about this effect.

KATY BRIGGS  Further policy actions are very specific to each country. In some cases, it is their tax scheme, in some cases, it’s transmission, it’s accelerating clean energy and incentivizing that. It’s also addressing permitting and siting of renewables, for example. It’s acceptance. It’s addressing the change that is going to need to happen and how that affects the economies and our markets. Market dynamics are not aligned toward what we need to achieve. Market signals are not there in a lot of prices. Price signals are not there for carbon pricing. A lot of those aspects that are not all there. And it’s not just one, we need to tackle all of these at once, and that’s part of the complexity. There certainly is a disconnect between policy and what is needed. The commitments across all the countries so far are not enough, and then also, turning those commitments into real action and binding action is not there yet. So, there’s definitely a gap. There are a lot of gaps. We’re still incentivizing what we thought was right a few decades ago.

Let’s look at our tax schemes, that’s one area where it’s not aligned with what we need in the future. How commercial contracts are written are not aligned. Also, the policies are not aligned to incentivize the right energy sources, or the right technologies, and mechanisms, and energy efficiency, and all of the different things we need to do to meet the Paris Agreement. So, there’s a lot of work to be done. How should policy change? There is a breakdown of trust in that that is the solution. We need to come together collectively and say, we are going to solve this together. It’s not this fragmented solution that’s going to work. We all need to come together collectively, and that’s going to really require trust between the different jurisdictions and different countries. I’m really hoping that we see policy as a solution and we really get together and put our efforts behind it to make sure we meet Paris Agreement, for example.

NARRATOR  The role of governments and the policy decisions they make is crucial to whether deep decarbonization can be achieved. But as highlighted so far by those we have heard from, there is some cause for concern. An analysis by the International Energy Agency found that while governments worldwide are deploying an unprecedented amount of fiscal support, aimed at stabilizing and rebuilding their economies. Only about 2% of this spending has been allocated to clean energy measures. So, in which areas can governments be doing more to regulate and invest to accelerate change?

DUNCAN BURT  One is the rollout of charging networks to support the rapid growth of EVs.

NARRATOR  That’s Duncan Burt, Director for COP26 at National Grid Group in the UK, who we heard from in episode one. His organization relies on close collaboration with government and other stakeholders, in order to drive necessary infrastructure improvements. These upgrades are aimed at boosting clean energy use, in this case, relating to electric vehicles.

DUNCAN BURT  We’ve been very clear with government that we think strategic investment is needed in that. Not because it’s not economically viable, but because we need to invest ahead of the curve and ahead of need, in order to facilitate the transition. As we see electric vehicle motoring grow really rapidly over the next few years, we are going to face a crunch in charging capacity, unless we really get after it. And again, we’ve been working with the ENA and the UK government on options to do that, and particularly, to get high capability fast charging installed at strategic points around the long-distance motorway network. That’s been a really, really constructive, really, really positive conversation with government and Treasury, but more still needs to be done on that, alongside the funding that was announced earlier in 2021.

NARRATOR  EV charging isn’t the only area where National Grid relies on government support. Duncan continues.

DUNCAN BURT   The second thing I’d flag is just the growth in infrastructure, for us, weighs heavily on our minds. We will build a lot of new network on and offshore, potentially, over the next 15 years, particularly offshore. And making sure we’ve got the right strategic planning processes in place to facilitate that through the planning and consenting process. And onshore, that means really good consenting practice. It means really clear strategic steers from government, and they’ve put new organizations in place, new committees and processes in place, to help make that happen. And then offshore, there’s a really clear need for comprehensive marine spatial planning. We did some work with policy exchange at the back end of 2020, really looking at the challenge of turning the North Sea into one of the global green energy hubs, which requires really good coordination right around the North Sea basin, with all the nations involved in that, particularly the UK and the EU. And it involves a really tight, good process for marine spatial planning, to make sure that we have enough space for cables and enough space for shipping, fishing, and for marine conservation, all alongside each other.

NARRATOR  Duncan also explained to us that support over the transition of heating, which we explored earlier in this episode, is his organization’s final major policy ask. It’s clear that while technologies and the investment to boost them may be at a mature stage, policy is the crucial element in unlocking the potential they carry.+++In this episode, we’ve focused, so far, on the role of investment and policy, primarily in the context of scaling up renewable technologies. But deep decarbonization is equally reliant on the rapid scaling down of fossil fuel dependence. This comes with its own unique and complex challenges. In episode one, we heard from Ditlev Engel, CEO of DNV’s Energy Systems business. Here, he tells us more about the fossil fuel conundrum.

DITLEV ENGEL  I think, when we talk about the deep decarbonization, we also need to understand that there are some huge financial challenges we have to handle at the same time. And let me just give you an example. We know that one of the very important things we need to get rid of very fast is the impact and the emissions from the coal industry and the burning of coal. But we also know that in the word that there are many new coal-fired power plants that have been built. And they have had a lifetime expectation of probably around 30 years. So, if you have a five-year-old coal fired power plant, and you then, to stop the emissions, are going to shut it down, who’s going to pay for those 25 years that it’s not going to produce? And how are we going to handle that? And there will be many such examples where we have to look at what is sitting on the balance sheets of current investments that are not yet depreciated and how are we going to handle that?

NARRATOR  Ditlev says we can look go recent examples to show how policy and investment have the potential to solve these kinds of problems, if the political will is there. How, then, might this current challenge of needing to scale back oil and gas production, despite existing reliance on the sector, be met? Back again to Macquarie’s Peter Durante.

PETER DURANTE   We do have lots of assets that are related to hydrocarbons today, so, transmission and distribution. We don’t own reserves of coal, or gas, or oil, but we do own a lot of natural gas lines and some oil pipelines. We do have some coal in our portfolio. But we really look at how we can either decommission these assets or repurpose them, or apply technologies that reduce/eliminate their emission. So, let’s just take coal, natural gas, and oil products in order. So, if we think about coal, we announced a policy before our net zero target that we would not be investing in new coal, and that coal that we have we would look to decommission. So, not just sell, but actually decommission and, or repurpose it. So, we’re actively looking at some of those, or all of those above as we speak. On natural gas, natural gas, for a lot of people, has been seen as a transition refuel from dirty coal to cleaner renewables. And that gas does have a really important role in terms of balancing the grid and all that sort of thing.

NARRATOR  Rachel Ruffle, who we heard from earlier, says that while rapidly decommissioning fossil fuels is important, so, too, is halting any further exploitation of oil, gas, or coal.

RACHEL RUFFLE  I think there’s still a gap between the high-level ambitions and the short-term targets necessary to actually get the ball rolling. So, whilst I welcome the high-level commitments, what we do need is clearer short-term roadmaps and targets. Also, either bans or disincentives for new build fossil fuel investments. As the IEA said quite recently, there shouldn’t be any more new projects to exploit fossil fuels. So, I think closing that gap between ambition and actual plans, I’d really like to see that.

NARRATOR  For Rachel, natural market forces will ensure that the financial incentives are there to create change.

RACHEL RUFFLE  It’s an easy choice because it’s the economics. It’s cheaper to build new renewable energy than it is to build new fossil fuel energy. And not much change on the demand. The washing machine works the same, whether it’s green or brown electricity. So, for hydrogen, the carbon intensive industries, for example, steel manufacturing, does really need to change its processes. And what will it take for them to do it? I think carbon pricing comes in here. So, a robust carbon pricing model worldwide, reflecting the ethos that the polluter pays. So, carbon pricing that accurately accounts for the true cost of emissions and the cost of global warming.

NARRATOR  So, considering all of the policy measures, incentives, and organic forces that we’ve discussed as part of this episode is their hope that deep decarbonization can be achieved. DNV’s Ditlev Engel provides his outlook.

DITLEV ENGEL  I think we need to approach the carbon challenge a bit differently from what we have done in the past. We know the carbon budget we have left to emit. So, it’s a bit like if you have an amount on a bank account, if you have 100, should I spend it all now and have a lot of fun next year, and then have no money to spend for many years? That’s one option. The other option is to say, well, I will spend as little as possible for something that I simply cannot avoid spending, and that, I will accept. But everything else, where I have a possibility to safeguard the 100, I will fight for. And that is exactly what deep decarbonization is about. It’s to preserve what we have left to emit and then make sure that we do it in the smartest possible way, while at the same time, we try to make headway with the technologies that are going to help us to make sure that we have substitutes, and thereby, we can increase the 100 to something else, because we can then actually start to see that we are using technologies that do not emit at all, which is, of course, the world that we want to get to. So, it is critically important that the regulation, and here, I’m not just talking about, for instance, the permitting and planning, we are also talking about how are we going to make sure that we look at the tax incentives going forward? We look at how we think about the integration possibilities, etc. And I fully appreciate that this is so much easier said than done by all of us. But this is not something the politicians can solve on their own. It has to be in close cooperation between businesses, and also, the population and the people. Because if there’s no public support for those actions, it’s very, very difficult for any politicians to make happen.

NARRATOR  In this two-part documentary, with the help of industry leaders, we’ve explored the importance of a deep decarbonization approach in meeting goals set out in the Paris Agreement. We’ve heard that while there is no silver bullet, through new and existing technologies and the robust financial and regulatory support, there is a way to make change happen before it’s too late. We hope you enjoyed listening. To listen to more of our podcasts, visit dnv.com/talksenergy.