4 Takeaways from the Financial Times Energy Transition Strategies Summit (1-2 December 2020)

The 2020 Energy Transition Strategies Summit

The Financial Times recently conducted their 2020 Energy Transition Strategies Summit on the 1st and 2nd of December. The agenda was made up of various players providing their experience and insight on the energy transition discussion and what forces are shaping where energy will go in light of the significant push to cut global carbon emissions having experienced the global shock of the corona virus. These players are summarized in the table below to emphasize the scope of expertise and perspectives.

After the two days of attentively absorbing the discussion panels and noting developments occurring in energy transition policy and problem-solving, here are my 4 main takeaways from the summit among many of the other insightful nuggets delivered.

1) Hydrogen’s role in the energy transition is gathering momentum

If a word/tag cloud was to be generated for the summit, the largest sized word glaring back at the audience would probably be hydrogen.
The idea of hydrogen being part of future energy mixes is something that has been touched on here on the FutureWattage article EV101 relating to use in the electrical mobility arena by auto manufactures like Hyundai via use of fuel cells. As a recap, fuel cell technology generates electrical current from the hydrogen via a chemical and not a combustion process. This electricity is produced with water as the only byproduct as opposed to fossil fuel combustion which occurs with carbon byproducts.

The discussion around hydrogen has since acquired a new gear over recent years as it gains recognition towards being considered a bigger scope solution to moving towards net zero emissions this century - a target that we see many companies and countries continue to adopt (see point number 4 in this listicle).

The starting point to see why this seemingly step change has occurred is to attain a familiarization with the main types of hydrogen. Simply put, they are categorized by colors signifying the carbon footprint in producing the hydrogen. This becomes the key emissions related factor in evaluating these different types of hydrogen since, as established, the actual process of using the electrical energy from hydrogen via a fuel cell is carbon emissions free.

Grey hydrogen is hydrogen derived from fossil fuels mainly natural gas via a method called steam methane reforming (SMR). A note can be made here that there is also the subcategory of brown hydrogen which is specifically hydrogen from coal gasification. Hydrogen from fossil fuels forms about 96% of all hydrogen produced globally.

Blue hydrogen is derived from similar process as above i.e. SMR but has in place methods of carbon capture and storage (CCS) and hence is sometimes referred to as low carbon hydrogen.

Green hydrogen is derived from electrolysis of water but this electrolysis is powered by renewable electricity such as wind or solar. It is currently approx. 1% of hydrogen produced.

The electrolysis route is far outweighed by SMR in practice since electrolysis has not enjoyed the same cost competitiveness. This is down not only to the cost of electrolyzers needed for the process at scale, but also due to the input electricity cost of the electrolysis process.

The advent of higher and continually increasing renewable energy in the mix therefore allows for reduction in the marginal cost of the electricity and also means the inherent energy loss intrinsic in the electrolysis process has a reduced negative impact on the economics i.e. the thermodynamic laws determined energy losses in the process of using electricity to produce hydrogen then going back to electricity again from this produced hydrogen.

It is therefore the momentum in green hydrogen development that has brought hydrogen to the fore. Not only does it provide a way of developing hydrogen with little to no carbon footprint as mentioned above but just as importantly, it offers a way to store renewable electricity particularly over extended periods of time compared to batteries that are better for shorter term storage. This means the two storage technologies can be complementary. This could be a game changing factor in a world with a significantly higher mix of renewables bearing in mind factors discussed in the FutureWattage Solar Flair and Energy Transition pieces relating to intermittency versus electricity demand patterns (see CNBC video below).

Realizing this growth still requires overcoming some significant challenges relating to elements like energy density per unit volume, liquid hydrogen storage and related infrastructure. However, just as seen with other technologies like renewables and battery storage, as momentum builds, solutions become more widespread such as conversion of natural gas pipeline infrastructure to be able to transport hydrogen as E-ON are doing in Germany or hydrogen storage via conversion to ammonia.

2) The Covid crisis has accelerated the headwinds on fossil fuels

The Covid crisis of 2019/20 has rattled many industries particularly those that hinge on unrestricted movement of people. At the core of why Covid has upended the global economic order is that it’s a shock of a Black Swan nature therefore external to most planning , forecasting and financial models as they would not have considered such a widespread and ubiquitously devastating impact taking over the global common consciousness.

What has transpired has meant that industries such as fossil fuels which were already experiencing headwinds from growing environmental concern have had their existential scrutiny fast tracked as a result. Coal already found itself as probably the most vulnerable of the fossil fuels but another distinct and long simmering example is the discussion/debate surrounding peak oil. This is when the maximum rate of oil extraction is reached before it begins to decline i.e. peak oil is defined as a supply concept. This can be viewed with the adjacent counterpart of peak oil demand which is the point from which demand begins to decline via transport and other oil based products moving towards other sources and/or higher efficiency alternatives.

Peak oil (supply and demand) are frequently considered an important demarcation to pinpoint as it could be a marker of when oil companies would be triggered to engage decelerating oil and gas leaning strategies and business models. However, this peak oil discussion never envisaged a disruption of this nature in creating an inflection point in the future of the industry. This is because peak oil has largely been seen as more of a gradual unfolding of affairs particularly as predictions to the timing were continually disproved as more oil was discovered with ever improving technology and oil and gas dependence increased in conjunction with this.

This is not to say 2019 as the last pre-covid year was the peak oil demand year, but rather to point out that the discussion around peak oil now has a high impact distinguishable trigger point coinciding with the existence of now proven alternative technologies such as electric vehicles - something the debate has never really had before. What happens from here will depend on many factors such as when a level of normalcy can return to daily life globally but also in play is what behaviors will not make a wide-scale return such as a high percentage of staff driving to office based work. The Bloomberg article “Peak Oil Is Suddenly Upon Us” offers some more insight into the peak oil discussion and includes this graphic below on various views on the oil outlook.

During the ensuing crisis, the majority of oil and gas super-majors have had to cut price forecasts for crude oil,  reduce capex and dividend spend therefore lowering the oil investment case while also increasing the cost of capital of further investment into oil. Part of this is no doubt responsive to the challenging cash-flow picture drawn out and colored in by low oil prices but it nevertheless has provided a watershed moment for the industry.

There might be differing views between the oil majors as to the future of oil. For example, those seen along the lines of European vs US based firms which subsequently flow into what the current low investment/capex cycle means for when demand catches up in the future i.e. low investment currently could mean limited supply in future and hence improved prices. This therefore creates a circumstance where future strategic and business model disambiguation is forced upon oil and gas companies with respect to where they see themselves in the future of energy especially when the temptation of higher oil prices emerges which is a possibility that cannot be discounted despite oil’s bearish outlook.

While it is not technically a like-for-like comparison with respect to business model and structure, this period has seen renewable energy players such as solar company NextEra Energy ( NASDAQ: NEE) briefly surpassing the market cap of oil giant ExxonMobil in October 2020 to become one of the most valuable energy companies in the world. And while it has since retreated from this high, with a latest market cap of approx. $145Bn, it is still currently at about 80% of Exxon’s latest valuation (as at 13 December 2020). Other manifestations of this challenged dominance reflect in ExxonMobil being replaced on the Dow 30 Index by Customer Relationship Management platform company Salesforce (NYSE: CRM) after almost a century being part of the index .

Another example related to this and frequently touted as a beacon to successful business model shift is the turnaround by Danish company Ørsted (Denmark: OMX) 12 years ago from earning their revenue from heating and power markets mainly sourced from fossil fuels to today being the largest offshore wind energy producer. The idea being re-enforced by these observations is that the new value chains offered in the transition can still deliver shareholder value as well as provide room for traditional players to pivot into them though the degree to which each will succeed in doing so if at all will differ.

3) Africa still seems to be largely on the fringes of global energy transition policy discussions

As discourse around the energy transition intensifies including constantly progressing policy developments, one still gets the sense that Africa’s voice remains a whisper in large forums. Part of this comes down to the two-sided rough and smooth nature of Africa’s situation with regards to carbon emissions which is that the low levels of industrialization and electrification have in turn meant that the continents emissions footprint is lower than the rest of the global continents. According to bp’s 2020 Statistical Review on World Energy, Africa’s emissions in 2019 of 1.1 Gigatons of CO2 were only about 1.9% of global emissions. For context, this can be viewed in relation to the continent’s share of global population of approx. 17%.

Though this means low emissions per capita, this may not be the ideal way to view Africa’s position since emissions impact on climate are not confined to global borders and do not operate on a per capita basis but on an absolute basis. In addition to this, we have already seen in recent years the changes in climate patterns adversely affecting agriculture which is a precarious position to be in for a region that attains 23% of its GDP from agriculture in the case of Sub-Saharan Africa. This is not to mention other elements such as employment and food security stemming from the sector. Also in play is the challenge with water scarcity given that 40% of the global water stressed population is in Africa.

Another angle to consider is that Africa is an important player in terms of the mineral resources required in facilitating green technologies. The general scope of these materials is shown below and some like Cobalt have over 50% of their global production and reserves in Africa while others like Bauxite and Manganese are majority found on the continent as well.

All this means that Africa has a vested interest in how emissions strategies are developed and needs to be involved in those conversations while simultaneously developing and heralding it’s own solutions unique to Africa’s position . These solutions could be based on levers such as mobilizing the large population with the consumer and energy technologies becoming widely available and cheaper the way China and India have done. Unification of some kind in order to present a joint front in global affairs is critical in a world with a powerful US, a powerful China and powerful EU. Granted the process of doing so is a different proposition for a country as opposed to a vast longitude spanning continent like Africa but the African Continental Free Trade Area (AfCFTA) agreement that comes into effect on 1 January 2021 is a positive step towards this . But if the world moves towards producing certain commodities like hydrogen or policy shifts like combustion engine bans as key steps to achieving net zero, then being out of sync with this could deepen alienation and limit the ability to leverage global learning.

4) This is an important decade for action

The last take-away point to come through all the discussions is how this decade has become a decisive one regarding the investment into strategies and business models that promote a net zero future. This is not only by virtue of the lead times of the associated learning and technology curves it takes to bring some of the technologies and solutions to scale but also due to the time available to successfully curb emissions to lower the subsequent temperature impact defined by the limit of 1.5 ℃ above per-industrial levels by 2100 set out in the Paris Agreement.

This image represents a summary of selected and officially announced net zero timelines:

Although the USA does not have an officially announced target date, President-Elect Joe Biden’s campaign energy policy was based on achieving net zero for the US by 2050. What this summary also tells us is that achieving this requires a collaborative effort across private and public sectors. These then in turn require buy-in from the global citizenry to consolidate the effort.

Investors and shareholders will also have an integral part to play given their input on desired returns and capital deployment in light of net zero targets. This is something that we have already seen in the form of ESG criteria becoming an increasing focus especially as such funds have outperformed benchmarks like the S&P during the Covid crisis. We have also seen other examples of this such as large institutional shareholders like the worlds largest asset manager BlackRock enunciate through a letter by their CEO and Chairman Larry Fink to CEOs that sustainability will be a key evaluation criteria in a world were climate risk is effectively investment risk.

Other policy actions continue to also gain more and more traction. One prominent example is bans on internal combustion engine (ICE) vehicles e.g. The UK announcing in November 2020 that ICE vehicles would be banned from 2030 or the state of California’s September 2020 press release announcing phasing out of new ICE vehicle sales by 2035.

Another policy measure gathering pace is the drive for more reflective carbon pricing. It is still however a challenge to get the sort of alignment required to get to a widely effective and standard carbon price given the nature and breadth of the climate challenge though this maybe possible regionally. Some argue that carbon pricing might not be the most effective tool because pricing carbon views emissions chiefly from an economics market failure lens rather than from an underlying system failure lens. However, it is more likely, just as many panelists indicated , that emissions and the climate challenge wont be tackled by a silver bullet approach but rather from a slew of bullets bombarding the target together in unison. Carbon pricing in whatever form it takes to be effective will therefore be one of those bullets rather than the Goliath stone equivalent.

Final thoughts

It is also worth keeping in mind that with this high momentum towards the energy transition, behaviors such as greenwashing will inevitably occur and be important for investors and the public alike to scrutinize. Evidence should be continuously sought that action is being taken towards truly achieving net zero as promised so that it’s not a tool for mere marketing. This can be difficult to distinguish given the volume of buzz words that naturally come with all the growth and capital being hurled toward the industry combined with its overall technical nature. However, as sustainability reporting continues to be standardized mainly through the Global Reporting Initiative (GRI) standards and the Sustainability Accounting Standards Board (SASB) , transparency will progressively improve. The last thing the global economy needs is a type of financial bubble based off overvaluation of the green economy. In a future article, we will delve further into the concept of emissions and the various level of measurement that are used to evaluate if and to what extend net zero is indeed being achieved.

The next summit is in just under a year’s time in October 2021 which feels eons away given the increased level of perceived uncertainty of current times but it will no doubt be enthralling and revealing just how much will have changed, accelerated or receded when we congregate then.