The Energy Transition & Hydrogen

In episode 18 of Industry Insights podcast, host Joel Simon and Elina Teplinsky discuss the financial community’s response to the energy transition including the focus on novel technologies such as clean hydrogen, advanced nuclear reactors and carbon capture and storage.

Joel Simon: With climate change and sustainability dominating the environmental landscape, there has been a lot of press in the last year or two about the energy transition. What exactly is the energy transition, and why is it so important?

Teplinsky: The energy transition can generally be defined as the pathway toward a transformation of the global energy sector. And that transformation is from fossil-based systems of energy production consumptions to zero carbon. The timeline is generally by the second half of the century, so the key is to reduce energy-related carbon emissions in order to limit climate change. Why is this important? You may be familiar with the United Nations Intergovernmental Panel on Climate Change. They have issued a number of reports about global warming and how we’re doing with meeting the climate change initiatives that the world has been working on now for more than a decade. In 2018, there was a watershed moment when they issued a report basically stating that global warming is accelerating at levels that have really not been estimated before. The report said that global warming is accelerating to 1.5 degrees Celsius above pre-industrial levels, and those levels could be reached by 2029 without major cuts in carbon emissions, and, even worse, a two degrees Celsius increase above pre-industrial levels could be met by 2050. Now, what do these degree increases mean? Look at what’s been happening over the past decade where we’ve been seeing already with only a one degree Celsius warming have been natural disasters, so, hurricanes, storms, heatwaves, forest fires, floods—just think of the number of hurricanes we’ve seen, for example. Think of the forest fires, the wildfires in California, the fires raging in Brazil just this week. These climate change-related risks to human health—to food security, to water supply, to economic growth—will all increase.

Simon: And that’s where energy transition comes in.

Teplinsky: Exactly. There are a number of sectors that are the main contributors to global warming, and the energy sector is one of them. Energy transition reflects and understands that the change really has to be dramatic and quick. The energy transition has to be a worldwide phenomenon; it can’t just be limited to a number of countries that are most supportive of it. And the most challenging geographical areas are emerging markets because that’s where the growth is—these are the markets that really need growth in electrification. They need to be able to meet the needs of their industry, their burgeoning economies, and, at the same time, they’re the most impacted by climate change, and, in many cases, the least able to afford its consequences. For the developing world, you need to have an energy transition that is not just climate focused, but also sustainable, and that are going to meet these industrial and global needs.

Simon: I know that the world’s energy mix has changed only slightly in the past 50 years, with the modest decrease in dependence on oil being offset primarily by increases in natural gas and coal, but many see this year’s dramatic drop in carbon emissions due to lockdowns and other pandemic-related issues as a once-in-a-generation opportunity for the transition to succeed, and to avoid a return to the pre-pandemic energy mix. Do you see that playing out in the real world in matters you’re handling for clients?

Teplinsky: These are good questions, and this is a topic of much discussion in the energy sector today. Most people would recognize that the global pandemic will give us some ideas of what the future of the energy sector may look like. As you note, [there seems to be] decreasing emissions because of a decreased use of industry, of transportation, of other carbon-emitting activities, and some people have noticed less pollution, bluer skies, cleaner oceans, and the question is will this continue? One, is there a real impact right now on climate change, and two, will that impact continue? There have been various studies and a number of opinions because this has only been playing out for a couple of months. There were several studies that looked at the impact of the pandemic as well as that impact being amplified by what’s going to happen with financial markets with industry growth. Generally, the consensus is that there is going to be some sort of climate change reduction as a result of the pandemic, but the question is really whether that change is sufficient. If you look at something like a metric of 8% reduction by 2050, that’s not really sufficient to keep below that 1.5 degree target. We would really need to repeat the decline that we’re experiencing right now in 2020 for every year on through 2050. So the change needs to be greater than the one that we’re seeing now. I think that’s the general consensus, although there are various opinions because there are so many factors involved. But there’s also a general consensus that the pandemic gives us an opportunity to reset and to build a sustainable energy transition.

Simon: And the role to be played by governments?

Teplinsky: Already, governments, in partnership with businesses and with civil society, are looking at how to build back a better economy once the pandemic is over. There are, of course, many efforts for an economic stimulus for that recovery. The consensus generally, across a number of countries, is that that recovery has to be compatible with sustainable growth and energy transition, so that recovery has to come with climate change goals in mind. One good example is the European Green Deal. That’s something that was launched by the European Commission at the end of last year. It basically puts together a framework of laws and recommendations that are aimed at achieving the EU’s target of net zero carbon emissions, which is by 2050. In the shorter term, the EU is looking at a 50% to 55% cut in emissions by 2030 from 1990 levels. We’ve increasingly seen a number of stakeholders, whether it’s the governments themselves, businesses, the financial community or climate change advocates, calling for the Green Deal to be used as a framework to tackle long-term sustainability goals while meeting the short-tern economic needs arising out of the pandemic, in general needed to propel economies forward. If we look at the U.S., for example, there is no consensus yet on a specific Green Deal or Clean Energy Deal, but if you look at the various legislative proposals as well as the funding that’s been given out by various government agencies like the department of energy, there’s really bipartisan support for a clean energy transition. Whether it’s something like advanced nuclear reactor development and demonstration, that’s been very bipartisan, things like alternative fuel, clean hydrogen and green ammonia production, you’re looking at energy storage technology, how we can improve that and make that more efficient, cost effective, robust carbon removal or sequestration. Maybe a decade ago, Republicans and Democrats didn’t agree on many of these issues, and now they do. If you look at the private sector, for us in particular as part of the energy industry team, we represent a number of electric utilities at Pillsbury, whether in the U.S. or overseas, and most of these utilities have a fleet with mixed fossils, nuclear, renewables, and in the U.S., for example, most of the largest investor-owned utilities have released carbon reduction plans. So utilities are making plans to reach these targets now. They’re looking at innovative technologies like advanced nuclear, which I mentioned earlier, hydrogen production, renewables and energy storage, carbon capture, sequestration. And hydrogen, in particular, is really interesting, because there are a number of utilities that have pilot projects to produce hydrogen from either renewables or nuclear power, which is green hydrogen, and it’s a really interesting trend of utilities getting into this sector that was previously dominated by oil companies, and not so focused on producing hydrogen using clean energy resources. How is that relevant to the pandemic? Well, all of these projects are not just going on; they’re accelerating. There are more and more projects that are appearing, so that really presents a very positive trend. Hopefully the pandemic has made us realize that energy transition is important, and it needs to be accelerated, and it could be done in a way that will help economies grow and will help businesses grow.

Simon: With all of those opportunities, Elina, it sounds like it might be a good time to be a lender or other financier in the energy sector to help facilitate this transition. Can you tell us about that?

Teplinsky: That’s absolutely right, Joel. That’s usually the first question, right—where are we going to get the money to accelerate the transition? How is it going to be financed? There is worldwide recognition today that climate change presents huge financial risks to the global economy. And that really starts at the government level. The government push is important for the private sector, as well. If you look at the multilateral level, they have all adopted these platforms to incorporate climate change initiatives into their portfolios. And the government incentives being provided by every government that is looking at this issue are generally very much aligned with climate change goals. In addition, you’ve got private markets—one good example is investment in off-shore rent. That’s completely skyrocketed in the past year or two. In 2019 alone there was $30 billion worth of investing and lending to offshore wind projects. There are big offshore wind projects in Taiwan and China, and off the coast of European nations like the UK, France and the Netherlands. When you’re looking at equity, there’s a significant pressure from investors for private equity to change direction and pivot to climate-change-friendly investments. One good example is the world’s largest asset manager, which announced in January of this year that they will now make climate change central to their investment considerations. Even on a larger scale, there is a group that requires investors to voluntarily sign a statement that has a number of climate change and environmental commitments. To date, that statement has been signed by more than 500 investors from across a dozen countries, which collectively manage almost $50 trillion in assets. That’s literally the financial community telling industry, “You’ve got to meet these climate change objectives, and you’ve got to do it in the short term. Otherwise we may not invest into or lend to your project.” Last, but not least, one interesting area is angel investors, that’s where a lot of money for startup technologies is coming from. Groups of angel investors who are coming together to work on and invest into new, disruptive technologies in the energy sector, and you’re seeing a lot of that with venture capital, as well. It’s a very interesting movement in the financial market, and it’ll be fascinating to see what happens in the next couple of years.