Podcast transcript: How the energy transition is being impacted

Chis Hagler

Welcome to Sustainability Matters, a podcast series of Ernst & Young, EY. My name is Chis Hagler. I’m one of the leaders of our Climate Change and Sustainability Services practice, and your host for this series. We designed this podcast series to provide leading trends and practical advice around the environmental, social and governance, or ESG, issues and opportunities facing businesses today.

As we head into a new decade, we are seeing a change in corporate leadership. In August 2019, 181 CEOs of the Business Roundtable, including EY’s own CEO, Carmine Di Sibio, signed a letter describing stakeholder capitalism as opposed to shareholder capitalism and specifically stating that the role of corporation includes supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

And recently, EY’s Embankment Project, conducted with the Coalition for Inclusive Capitalism and vetted with more than 30 organizations, identified societal and environmental value as a critical component of a company’s value creation strategy. So, in this new era of responsibility, we see an increased focus on climate change, and that’s what we’re going to talk about today.

Today, I’m joined by Jules Kortenhorst, the CEO of Rocky Mountain Institute, and Klair White, Senior Vice President with EY’s Infrastructure Advisory Group. I hope you’ll be intrigued, inspired and energized by our conversation today. We are going to talk climate, new technology and galvanizing for action. And as always in our podcast, we’re going to include practical advice for our listeners. As we get started, Jules, thank you for joining us. Can you tell us a little bit about Rocky Mountain Institute?

Jules Kortenhorst

Yes, I can. Good day, everyone. Rocky Mountain Institute was created almost 40 years ago based on the insights or foresights of our founding father, Amory Lovins, who already at the time envisioned a transition to a much more sustainable energy system. And over the first 30 years of the existence of the institute, our focus has very much been on providing those insights to industries, business leaders and policymakers around the world how the energy system can be both more efficient and more sustainable.

Over the last six to seven years, with the accelerating pace of climate change, our focus has additionally become to dramatically accelerate the pace of the transition as we have to rapidly reduce greenhouse gas emissions to safeguard the planet for future generations. We have 250 people in 8 offices around the world — China, India, the US, and a small office in Africa — and our work is very much focused on business-led, market-driven transformation of the energy system.

Hagler

Awesome. Well, we’ll look forward to learning more about that as we go through our podcast today. Klair, can you tell us a little bit about the infrastructure services at EY?

Klair White

Absolutely. Thanks, Chris, I’m very happy to be participating. From a transaction perspective, EY is helping companies to develop and implement their clean energy strategies, which typically involves identifying and analyzing a whole range of alternative renewable energy procurement options in the context of any particular organization’s geographical footprint and energy consumption profile in order to offset some or all of their electricity consumption or their carbon emissions, depending on the nature of their target.

More broadly speaking, EY is also helping companies to think about energy management more strategically and holistically, based on what we call a 3D energy strategy, which looks at the three dimensions, volume, price and time — to identify opportunities to consume less energy overall, volume; exploit timing efficiencies through more effective energy planning, time; and source energy at a lower cost, price. All of which typically lends itself to a lower carbon outcome even if the primary driver was initially cost reduction or operational resilience.

Hagler

So, it sounds like some really practical approaches that you’ll be able to help with as we go through this.

White

Absolutely. It’s very helpful to have a framework for decision-making for sure.

Hagler

Absolutely. Well, let’s talk about what problem we’re all trying to solve. Jules, Rocky Mountain Institute talks about energy transition. What do we mean by that?

Kortenhorst

The energy transition, in our minds, stands for the shift towards a decarbonized, decentralized and often, also, digitized energy system that, above all, eliminates greenhouse gas emissions from our energy system. Right now, we are truly in a planetary emergency as it relates to climate change. The International Panel on Climate Change has identified the fact that we have 10 years to reduce greenhouse gas emissions around the world by 50%. That means 10 years, 50% reduction in emissions around the world.

It is a daunting challenge, and in order to meet that challenge, with energy representing about 70% of global greenhouse gas emissions, we have to rapidly and massively shift our energy system away from fossil fuels towards the low-carbon energy solutions of the future.

Hagler

I understand that the IPCC report is definitely a galvanizer for a lot of people. It helps us understand how urgent this problem is. It appears that corporations are beginning to pick up this energy a little bit and that they are pursuing more efforts as it relates to energy transition. What do you think is driving that?

Kortenhorst

I think there are several trends. First and foremost, I would say that chief financial officers, chief risk officers, chief executives are starting to come to grips with the massive risks associated with climate change. Those risks both cover the physical risks associated with the infrastructure and supply chain of companies, but it also covers the transition risk associated with the fact that, at some point, humanity will take more drastic steps and your business might suddenly look very different if carbon is priced at $100 a ton, or if fossil fuels are banned, or if the automotive sector has massively shifted to electric vehicles. So, risk is one big factor.

But a second big factor, that I think we are seeing becoming more and more relevant, is the one of license to operate. How do companies think about the engagement of communities, of civil society, of populations, with the issue of climate change and how does their right to operate, their license to operate, get influenced by the perception that communities and societies have about their carbon footprint? So, I think it’s both a risk and a public perception point that is driving this.

Hagler

And Klair, would you agree with that with your clients?

White

Absolutely. And I think you mentioned the CFO as a very important stakeholder, and I think traditionally energy has just been an operating expense in the P&L, and nobody has given it much thought. And it’s always been just thought about as an unavoidable cost. The utility bill arrives every month, and it is paid. And I think, one, there are now more options to decouple supply and demand. So, as energy sources change, options expand beyond utility services to include competitive distributed generation, financeable energy efficiency programs, intelligent optimization technologies. This pun is going to come up at some point, but companies now have the power to manage their supply and demand differently, and it can be more strategic.

But I think one of the big drivers is cost. Renewable energy technologies — wind and solar in particular — the cost has come down incredibly, certainly in the last 10 years. But if we even just look at this year alone, 2019 going into 2020, in the first half of the year, the levelized cost of onshore wind fell another 10% on prior year, solar 18%, offshore wind 24%, and storage, which has the potential to really disrupt the energy market both at a utility scale but also behind the meter, dropped 35%. And these are numbers the CFOs and companies more broadly are paying attention to.

Hagler

It’s an amazing shift in such a short period of time. Jules, I expect that that’s probably part of what you’re seeing, too. First of all, the increase availability of technology, and then the increase accessibility of technology.

Kortenhorst

Absolutely. It is the dramatic cost reductions that have shifted the mindset about our power sector and about what can be done in a very significant manner. We peer into the future when it comes to cost and whether it is solar, or batteries, or wind, we believe that these costs will continue to drop. And of course, that’s very different from what we see with fossil fuel power generation where the cost is stable or going up. So, lower cost and better technology solutions is definitely a big driver behind all of this, but there are a few other things as well.

The first one is that, just like we’ve seen in telephony in emerging markets and developing countries, we’re seeing a leapfrog to the technologies of the future. So, increasingly, countries are starting to realize that they don’t need to invest in the infrastructure of the past, but they can jump straightaway to the renewable energy solutions of the future.

And then, finally, I’d say that in much of the world outside the United States there is also a very significant pulse, wind in the sails of the energy transition. It may be something that isn’t immediately apparent when you look at the energy system from a US perspective because of the dysfunction in DC at the moment, but around the world, governments are grappling with the challenges of climate change, are recognizing that the energy transition needs to accelerate, and are, therefore, putting in place the sort of bold policies that drive innovation, that put a price on carbon and that move whole sectors of the economy rapidly to the low-carbon solutions of the future.

Hagler

Continue down that thought process around putting policies in place that drive solutions or drive action. Are you also seeing corporations doing the same thing? Maybe putting big goals out there that drive action or create markets, or maybe some organizations like RE100 driving action? What are some of the other things you’re seeing driving action out there?

Kortenhorst

I think it is an important point to realize that policymakers gain confidence when market share is moving in a certain direction, and then they’re willing to put policies in place that drive markets further. So, there’s a virtual circle there.

Hagler

It sounds very circular, yes.

Kortenhorst

Absolutely. And so, in addition to what is happening in the policy arena, we are, indeed, seeing many companies taking a leading role in setting goals for their decarbonization in announcing their commitment to 100% renewable electricity, or even more boldly, to greenhouse gas emission goals in line with the Paris Agreement — so-called science-based targets. And financial institutions — partly motivated by disclosure rules, partly by a better understanding of the risks associated with climate change — are starting to put in place mechanisms by which they can more appropriately better manage their exposure to climate risk and to greenhouse gas emissions and to fossil fuels.

So, momentum from the private sector is building around the world as well. This is definitely something that is happening as much, if not more, outside the United States as it is happening domestically.

Hagler

Except that in the United States we have so many international corporations headquartered here that I imagine they all have to participate in what’s happening globally regardless of whether or not there are US regulations that drive it.

Kortenhorst

Yeah, I think that US companies struggle a little bit around this issue and the debate around it in Washington, DC at the moment. On the one hand, you’re absolutely right, they are committed to goals and are operating internationally in a way that requires them to be part of this, and at the same time, if you speak too loudly about the issue of climate change in Washington right now, you might be at risk of a tweet storm. (Laughter) And that trade-off, every company deals with that slightly differently. Right? I would say that corporate leadership in the US is rapidly coming around to the fact that this is happening and it’s only a matter of time before the US will catch up.

White

You mentioned trade-off there, and one of the things that I’m finding with my clients is that there are lots of different objectives at play when we talk about climate resilience, and operational resilience, and costs. I think every company wants to reduce their costs associated with energy, they want to move towards carbon neutrality and sustainability, they want operational resilience, they want to manage their risk.

But I think every company has to decide what the right hierarchy objectives are because there are trade-offs with some of the decisions about how to address energy and climate change risks. And I think it’s absolutely right to pursue all of those objectives, but I think an organization, at a quite senior level, has to agree and kind of buy into what is the hierarchy of objectives for that particular organization so that when the trade-offs come up, they know kind of where their appetite is. Whether it’s primarily cost reduction vs. carbon reduction because very few companies think it’s sustainability at any cost. So, where there are trade-offs, I think it’s good for organizations to know what their priorities are.

Kortenhorst

But isn’t it interesting, Klair, that increasingly, I think, we’re seeing these things coming together. Right?

White

Yes, yes.

Kortenhorst

Where costs are coming down for renewables, and therefore, decarbonization is both good for the reputation of the company and for its carbon objectives, but also good for the bottom line. And in fact, we’ve recently seen, both in California following the forest fires and in Puerto Rico following the hurricanes, that resilience is often also tied to a more distributed, decentralized and decarbonized power supply. So, these things are nicely coming together.

White

They are very much so. I mean, only kind of five years ago there was a trade-off between cost and carbon. I think probably where I see the potential trade-offs, or the hierarchy of objectives, is probably where corporates are having to look at the different models for procurement that are emerging, whether that’s on-site, off-site PPAs, green tariffs, renewable certificates, and then increasingly virtual power purchase agreements that kind of are akin to a financial hedge. They have different characteristics in terms of additionality, cost, risk, and the best-case scenario is where everything comes together beautifully in the right direction, but sometimes there are trade-offs.

And I think as more interesting models emerge for corporates to be able to procure renewables beyond just purchasing certificates, it’s a really interesting time for companies to work out where their priorities are and how best to achieve that. And a lot of that depends on where their footprint is in the US.

The US is a fragmented market. There are many different regional electricity minimarkets, almost, within the US, but also different parts of the grid have different carbon intensity. So, a kilowatt hour displacement in one area might be different elsewhere. So, there are a lot of moving parts to the decisions that corporates have to make about how best to achieve their goals. But I absolutely agree, we can only hope that it’s all converging to make those trade-offs easier.

Hagler

Jules, wouldn’t you say that cities, states, other localities are dealing with the same sort of issue in terms of trade-offs and meeting different needs of different constituencies and different solutions for doing that? How does Rocky Mountain Institute work with different organizations, whether it is a city or a corporation, to really help them think about decarbonization?

Kortenhorst

Yeah, you’re absolutely right. This movement is not just a movement in the corporate world. It is also something we’re seeing increasingly among other so-called non-state actors, city, state universities, investors.

In fact, recently at the Madrid climate negotiations, Rocky Mountain Institute was part of releasing a report of America’s pledge, an effort supported by Bloomberg Philanthropies and Governor Brown to tally up the commitments of businesses, and states, and cities, and investors and universities who all have said, “We are still part of that commitment that the US made under the Paris agreement.” And if you tally all those commitments up, you can see that that community of actors can deliver a 37% reduction in greenhouse gas emissions by 2030, compared to 2005. That is not all the way where the US should be to be fully compliant with the Paris Agreement, but even in the absence of federal policy, the US is doing more than people might think at first glance.

But what is interesting is that — not very different from what we saw with corporates — cities who want to embark on this path need help. Right? Because if you, historically, have just signed the utility bill, now you want to sign a corporate or a city power purchase agreement. That means you have to structure a transaction that is more complicated. And so, we bring cities together, we bring corporates together, who can learn from each other, and we involve advisory firms in our Renewable Energy Buyers Association, in our city renewable platform, where people learn from each other and work together to put these deals together and to move them through their internal processes.

Hagler

It sounds like collaboration is a big part of the solution as Rocky Mountain Institute tackles some of these issues.

Kortenhorst

Yes, absolutely. Collaboration is a crucial ingredient in many of the decarbonization efforts. Because we’ve talked a lot so far about the power markets and electricity, where there is already quite a significant community of suppliers and solutions are available. But there are parts of our economy where we want to decarbonize where the pathways are not that obvious.

In aviation, where sustainable aviation fuels are not yet abundantly available, or in steel and cement, where the industrial processes for decarbonization of the future are not yet obvious — and it is certainly also in those sectors that companies can benefit from working together to establish those technology pathways that bring the low-carbon solutions of the future to life.

Hagler

Normally in our podcast we talk a lot about what’s next. It turns out we don’t have a lot of time to talk about what’s next. So, I’m hoping you’ll be able to stay for a second part, because what you two are talking about is painting such an opportunity for the future. I would love to spend a little bit more time in a next section to talk about what is next as it comes to decarbonizing society. So, we’re going to wrap this one up.

Please, to our listeners, if you want to learn more about Rocky Mountain Institute, please connect to RMI.org or follow them on Twitter at @RockyMtnInst. You can also follow me at @chrishagler and EY Sustainability Hub at @EY_sustainable. And do please subscribe to this podcast wherever you subscribe to your podcasts. Thank you.