I feel a bit as if, half way through the film Jaws, I’ve wandered out of the sitting room to make a quick cup of tea, and come back in to see the giant shark with its teeth around the fateful pressurized air canister.
That feeling of accelerated time was my reaction to last week’s BloombergNEF New York Summit, the biggest gathering of thought-leaders we hold each year on the future of energy. Somehow, ideas that would have been alien to most people in those sectors until very recently, have suddenly gone right into mainstream thinking.
Take the virus-like spread of net-zero commitments, or carbon border adjustment, or a “just transition”, or a massive build-out of U.S. electricity networks, or strict capital discipline and high investor pay-outs by oil and gas companies, or Japan looking to lead on emission reductions, or a take-off for U.S. offshore wind, or the return of carbon capture and storage.
Times have certainly changed dramatically on decarbonization. Part of that is just a reflection of the topic itself – try writing a book about the energy transition that isn’t out of date before it’s published. Part may be down to the pandemic, which has forced many companies and investors to focus more on the sustainability of business models.
Part of it is down to the sudden switch in Washington in January from the transition-resistant Trump administration to the green agenda of the Biden team. And part may be down to geopolitics, which have shifted from the globalization of the 2000s to a fraught competition of ideologies in the 2020s.
Below I spell out seven of the main messages my BNEF colleagues and I took from the April 13-14 Summit on energy, finance and technology. It was held virtually of course this year, but offering the same quality of thought-leadership as before to the 1,000-plus invited guests. Videos of many of the sessions can be seen here. BNEF clients can see underlying materials, including presentations, on the insight channel on bnef.com and on NH BNE <go> on the Bloomberg Terminal.
1. Net zero by 2050, or should it be 2040?
The phrase “net zero” appeared only 81 times in Bloomberg news and analysis articles during 2016, the year immediately after the Paris climate change conference. So far in 2021, in just three and a half months, it has appeared 1,400 times.
During his ‘BNEF Talk’ at the Summit, my colleague Jonas Rooze, head of sustainability research, said that ideas can spread like viruses, and that net zero was a clear example of that. At the start of 2019, only 15 of the largest 400 companies in the world had announced net-zero targets. Now, some 150 have them.
The contagion analogy works in another way too. Rooze showed that it is spreading particularly fast within industries – so, for instance, there was a doubling in the number of financial sector companies committing to net-zero targets in the first three months of 2021 alone.
That may be good news in general, but the spread of the net-zero idea comes with two caveats. The first is that, as more companies sign up, there is a tendency for the average quality of the targets to slip. There is a temptation for company boards to declare a net-zero objective for 2050, in the hope that pressure on sustainability will then go away. On the other hand, competition within sectors can also kick in, forcing companies to improve their targets, step-by-step. This seems to be happening in European oil and gas, with Repsol, Royal Dutch Shell and Eni trying to outdo each other.
The other caveat with net zero 2050 is that it may well not be enough. Michael Bloomberg, founder and majority shareholder of Bloomberg LP, said in a two-way chat at the Summit with White House National Climate Advisor Gina McCarthy that 2050 “should become 2040, and 2040 probably should become 2030”. He added: “2050 has been a very good number for people who want to make speeches. I don’t know hardly anyone that has given speeches about climate change who will be alive in 2050. It is very easy to promise something that you know you will not be around to deliver. Unfortunately that takes away from the public’s understanding that we have to do something right now.”
McCarthy replied: “I totally agree that it is not about 2050, it is about what we do in the next decade. If there is another decade of delay, we will never be able to recover.” She added: “We have to think creatively about deploying what we already know works.”
Indeed, the White House is expected to unveil a 2030 target during the virtual climate change summit it has organized later today and tomorrow.
2. A 2020s view of trade and supply chains
In the first decade and a half of clean energy effort (if we are generous and say it began in 2005), there was a simplistic focus on cost, and another on national emissions. The task was to buy the lowest-cost wind turbines and solar panels (admittedly still expensive in absolute terms in the early years) to limit the impact on electricity bills. It was also to control and then reduce emissions within your own national borders.
Increasingly, it has become clear that this isn’t enough. The revisionist view was in evidence at last week’s Summit, as speaker after speaker highlighted the importance of evaluating supply chains.
Jennifer Granholm, U.S. secretary of energy, told the Summit: “I’ve seen the results when a country has said ‘we are just going to chase the lowest costs’, and what that means for jobs. We end up with a manufacturing sector at a 72-year low.” She also spoke of the need to “get the ball rolling” on creating a supply chain of battery metals, “mined responsibly”. She said: “If we want energy independence, we have to make the stuff here.”
Valdis Dombrovskis, the European Union’s trade commissioner, was asked whether decarbonization of sectors like steel was possible without deindustrializing. He said: “With energy-intensive industries, the issue of carbon leakage is topical right now. So, in the European Commission, we are working on carbon border adjustment.” He added that this would be compatible with World Trade Organization rules, and there would be “a uniform approach for European producers and importers to meet”.
The danger is that clean energy gets more enmeshed in trade barriers than it did during the Trump administration. Sarah Ladislaw, managing director of U.S. programs at the Rocky Mountain Institute, said: “We can’t do this without China. We have to figure out how to make it in our shared interests. The good news is that this is the economy of the future [for every country].”
Coming up much more often than at other BNEF New York Summits was the link between decarbonization and jobs, and the notion of a “just transition”. The Biden administration, and those similarly inclined in business, may be realizing that if they want this transition to be sustainable, they will have to have people vote for it over the course of multiple elections, not just one.
To be successful, the energy transition needs to not only be for those currently working in fossil fuel sectors but also, particularly in the U.S., those hampered by racial inequality. Paula Glover, president of the Alliance to Save Energy, said that energy efficiency improvements were the place to start, on the way to “environmental justice and equity”. My colleague Ethan Zindler will be writing more on this in the coming days, summarizing a discussion at the Summit with Ralph Cleveland, CEO of the American Association of Blacks in Energy.
3. Big intervention needed to reach clean power system
In a somewhat haphazard way, U.S. energy policy in the last 15 years has amounted to “let a thousand flowers bloom”, as my colleague Ethan Zindler, head of Americas, said in his BNEF Talk to the Summit. Wind bloomed, as did solar, as did shale gas. Nuclear and coal struggled to cling on.
That era now seems to be over. The Biden administration wants the U.S. power system to be zero-emission by 2035, and that will mean accelerating the build-out of renewable energy, and of the transmission and distribution networks (something that is also part of the drive to renew America’s infrastructure).
Addressing the first of these intentions will involve extending the tax credits for wind and solar, and perhaps – according to Granholm – introducing them for standalone battery storage projects. The administration also wants a national clean energy standard. Granholm raised the possibility of some kind of “race to the top” system whereby individual states set clean energy goals and then get a reward from the federal government for achieving them.
The power crisis in Texas in February, as freakishly cold weather caused generating units to struggle or fail, sending electricity prices through the roof, shook the energy sector and put the quality of U.S. infrastructure into the spotlight.
Calvin Butler, chief executive officer of Exelon Utilities, said: “We are profoundly aware of the vulnerability, particularly when it comes to the grid, and the influence on so many lives. All of us are connected to the grid in such an intimate way.” He added that “upgrades to the resilience of the system” are of utmost importance.
A later Summit panel session – made up of utilities and regulators – discussed the lessons of the Texas crisis, and of power system problems in California. The consensus was that other things in those states had been prioritized over reliability. In the case of California the pursuit of decarbonization was prioritized over reliability, in the case of Texas the pursuit of cost reductions was prioritized over reliability. The conclusion was that the U.S. is going to need as much investment in the distribution system as on the supply side in order to maintain reliable electricity provision.
The panel discussed how one lesson of the Texas crisis was the co-dependence of power and gas infrastructure. A lot of gas infrastructure was disconnected from power and then couldn’t deliver gas to power stations, compounding the problem. If it had been registered as critical infrastructure, this would not have happened. So there’s an administrative aspect to reliability.
Others have argued that, in doing their rolling blackouts, power companies weren’t conscious that they were shutting off power to gas compressors that would help deliver gas to them, and that this may have contributed to key gas infrastructure freezing.
As for California, its resource adequacy framework was developed 20 years ago and is suited to the challenges of the grid then. It was designed around a 4pm peak, but this is no longer valid, the panel heard.
In March, the Biden administration set out a target of 30 gigawatts of offshore wind by 2030, up from a meager 42 megawatts now. A Summit panel session on the topic noted that, 36 years since the last big transmission line was built in the U.S. Northeast, five new lines are currently in construction. However, further grid works will be needed to maximize the benefit from the coming offshore wind boom.
4. Corporate sustainability 2.0
Corporations are under pressure from investors to demonstrate green credentials, and the conversation is becoming less naïve and more sophisticated. Carbon offsets are coming under much more critical scrutiny, the leaders are breaking new ground on corporate energy procurement, and banks are facing the heat over ‘financed emissions’ – those generated by companies they lend to.
A Summit panel on “The Corporate Race to Net Zero” consisted of senior executives from Amazon, Google, Glencore and Eaton, four companies that have announced net-zero targets. These would, if met, result in 420 million metric tons of CO2 being removed per year – equivalent to the current emissions of Mexico.
Google has journeyed through several stages of emission targeting already, first of all using offsets to “neutralize” operational emissions, then buying clean electricity (5.5 gigawatts of it) to match its power demand in volume terms over a year, and finally aiming for a more direct relationship with green energy.
Marsden Hanna, head of sustainability and climate policy at Google, told the Summit: “In Nevada, we have made our largest solar-plus-storage procurement, for a data center we have there….enabling the accounting of clean electricity procurement not on a monthly basis, but getting toward something that is denominated on an hourly basis.” He said that for 2030, the company has an “absolute-zero goal for operational emissions” over “every hour of every day”.
Glencore has, alongside a net-zero goal, a strategy to rebrand itself as an enabler of new energy. Anna Krutikov, its head of sustainable development, said it was now prioritizing “capital allocation toward those commodities that play an essential role in the transition to a low-carbon economy”, notably battery metals.
She defended Glencore’s decision to hang onto coal mining assets: “We thought very long and hard about our strategy. We thought that what the world needed to achieve…..is a gross reduction in emissions over time. We believe that by committing to a responsible, managed decline of our coal portfolio over time, we are going to achieve that trajectory.” She added: “Selling those assets maybe gets emissions off our balance sheet, but it doesn’t actually contribute to the gross emission reduction that we need to see occur.”
5. U.S. oil companies as a new type of yieldco?
The idea of a yield company, or yieldco, as hatched in the 2013-2015 period, was for new quoted vehicles to own operating-stage renewable energy projects and pay the vast majority (80% to 90%) of annual cash flows straight out to their investors in a regular dividend stream. The model has had some ups and downs in North America, but a smoother ride in Europe via the closely related quoted project funds. Investors are hungry for yield at a time of low interest rates.
It was striking then to hear at the Summit how some U.S. oil and gas companies are now moving away from buccaneering growth toward a high distribution of cash flows.
At a panel session entitled “What’s Next for North America’s Oil and Gas Business?”, Scott Sheffield, chief executive of Pioneer Natural Resources, said: “We changed our entire model from a growth company to a company that is focused on free cash flow. We have taken growth off the table, off any kind of compensation metrics.” He added that the aim was to pay out 75% of the free cash flow to investors.
Bruce Niemeyer, vice-president of strategy and sustainability at Chevron, said: “It is essential that we focus on capital stewardship and improved returns and the value proposition for investors. At the same time, the future of energy will be lower-carbon, and we have to focus on that too.”
Investors are breathing down the necks of oil and gas companies. Niemeyer said that sustainability is “certainly a topic in essentially every investor engagement we have.” Sheffield said that there was a significant change in the investor conversations between 2016 and 2019, with a lot of questions coming about the ‘E’ of ESG. Pioneer has responded by working to cut methane flaring in the Permian Basin, from one billion cubic feet two years ago, to 200 million today. “We just have to remove that black eye,” Sheffield said.
Of course, there is plenty of room for skepticism about hydrocarbon companies and ‘greenwashing’. Lynn Doan, managing editor of energy and commodities for Bloomberg News, pointed out in the same discussion that oil companies’ capital spending on clean energy was still only a “fraction” of total investment.
However, the fact that companies like Chevron have get goals for 2023 and 2028 and said that they are aligning with Paris will give investors plenty of scope to challenge them over the years ahead.
The consensus at Summit was that rapid change is afoot, but complete change won’t come overnight. “This is an energy transition, it’s not an energy revolution,” said Pooja Goyal, co-head of the infrastructure group at Carlyle, during a side session that brought together leading private equity investors.
6. Japan may finally be about to play a big role
To borrow Sherlock Holmes’ “curious incident in the night time” concept from the story Silver Blaze, Japan has been the big dog that has not barked on clean energy. Yes, the country has a good record on energy efficiency and, yes, it has invested a lot in mainly small-scale solar in recent years. But the world’s third biggest economy, with a wealth of clean energy options and a dearth of domestic fossil fuel resources, has not been a leader in the energy transition in terms of either commitments or actual emission control.
However, the words and body language of Japan’s Environment and Climate Change Minister, Shinjiro Koizumi, at the BNEF Summit suggested that this particular hound is belatedly preparing its vocal chords.
Koizumi said: “Our aim is to set an ambitious 2030 target,” adding that the revised Nationally Determined Contribution will be announced “as soon as possible”, before the COP26 climate talks scheduled to take place in November. The nation is also considering the implementation of a carbon-pricing regime, which could include an emissions trading system or a border tax, he said.
Renewable electricity has increased in Japan but, at 20%, its share is relatively modest compared to those in some European countries, for instance. Koizumi cited a recent study saying that Japanese renewable energy has the potential to double. “The ministry of environment will encourage the mainstreaming of renewable energy,” he said. He mentioned floating offshore wind and hydrogen as particular areas for development.
Equally important for reducing emissions is to move away from coal. Koizumi said: “I pushed hard for the revision of the coal policy last year…..METI [the Ministry of Economy, Trade and Industry] is studying concrete policy measures to phase out older and inefficient coal-fired power stations.”
Japan has attracted a lot of international criticism over the willingness of its public sector institutions to help fund coal plants in other countries. One of Koizumi’s priorities was to change this, he said. As a result of a new policy announced last July, “it is now very unlikely that new coal-fired power stations will be built abroad under our country’s assistance,” he said.
7. Carbon capture is back in town
I would have to rack my memory, and go back to 2009, to find one of our Summits where carbon capture and storage was being talked about as one of the main areas of clean energy, and as a genuine investment opportunity – as opposed to a parenthesis uttered by the occasional fossil fuel company executive.
Last week, however, it was clear that CCS, or CCUS if you prefer, is very much back on the menu. Seifi Ghasemi, chairman, president and chief executive of Air Products, told the Summit: “The next phase [for hydrogen] is to ask ‘can we capture the carbon?’ It will cost more [than making hydrogen from methane reformation and releasing the CO2], but it will go in that direction in the first phase.” Only sometime later, he said, would ‘green hydrogen’ based on electrolysis be cheap enough to come into its own, with the help of a carbon tax.
Gretchen Watkins, president of the Shell Oil Company, told a panel session on achieving a clean and resilient economy that her company’s analysis suggested that, with important roles for carbon capture, electric vehicles and hydrogen, the U.S. reaching net zero by 2050 was “actually very doable”. She went on to say that Shell is intent on decarbonizing manufacturing processes and capturing those emissions. “So carbon capture is where our focus lies. We have invested a significant amount, and would love to invest more.” To get there would involve “some policy adjustments”, both in the U.S. and elsewhere.
In a lively debate entitled “The Amazing Race to Decarbonize Molecular Fuels”, Julia Attwood, BNEF’s head of advanced materials research, argued that where CCS “really shines” is in the cement industry, where half of emissions come from chemical reactions rather than the heating process itself.
Asked about the retrofitting of fossil fuel power stations, Attwood said: “CCS is an added cost, but it can be offset by selling the CO2, or through a subsidy. It only needs a carbon tax of $30 to $60 a metric ton.”
A message from the Summit was that the future may well not be a choice of CCS or hydrogen. It is more likely to be CCS and hydrogen, in some circumstances working closely together. Hydrogen is being seen as a plausible answer for the hardest-to-abate sectors and for providing non-intermittent zero-carbon power.
One consequence of pressing the fast-forward button on a television is that issues that you were previously seeing being contested – such as, in Jaws, whether Mayor Larry Vaughn should close the beaches on Amity Island to swimmers – are taken as read.
This year’s BNEF New York Summit showed that, for now at least, the debate around decarbonization has moved away from the “whether” and even the “how now”, to the “how next”, and the “who” and the “by when”.