6 June 2023 | Global
The race to decarbonize is on. A growing number of companies recognize the need to accelerate the pace of their energy transition. Whether nudged in the right direction by investors, consumers, regulatory pressure or the ability to attract employees, increased sustainability has become an imperative for organizations to remain relevant and competitive in today’s world. While change is on the way, companies still face barriers to implementing their green ambitions.
Our experts sit down to discuss practical steps, strategies, and innovative approaches for organizations looking to implement a decarbonization strategy and shape a more sustainable future.
Transcript has been edited for clarity
Clemence: Hello and welcome to DecarbonACTION. The podcast that discusses concrete actions, strategies, and innovative models to reduce carbon emissions at scale and create a more climate-friendly future.
The science is clear, we need to act on climate change today. This webcast series will be all about implementing decarbonization in a company, how to overcome barriers to climate action, roll out a decarbonization program over multiple sites, and identify technological, financial, and procurement synergies.
Today our topic is why and how you should start implementing your decarbonization strategy. But before we dive in, let me introduce our guest for today, Kirti Rudra a director at ENGIE Impact with over 17 years of experience in the energy industry, with a focus on long-term, asset base deals. This includes energy performance contracts, as-a-service models that deliver real decarbonization savings for clients. Welcome, Kirti, very nice to have you today.
Kirti: Thank you, Clemence. I'm delighted to be here with you to share my experience with our listeners.
Clemence: So many companies have already made commitments to decarbonize their operations, assets, or supply chain. But, going into the implementation of these commitments is not easy. Earlier this year, an organization called the Carbon Disclosure Project (CDP) reported that of the 18,000 companies that participated in their 2022 climate change questionnaire, only 22% say they had already developed a 1.5-degree aligned climate transition plan (a plan in alignment with the Paris Agreement objective). And only 0.4% of companies cleared the higher bar of having a credible plan in place. That's actually very low. The discrepancy between intention and action is not due to a lack of organizational will, but rather to companies lacking a structured way to realize their ambitions and goals through concrete action. Kirti, I'd really like you to help us today in understanding why and how we can find a way to match the will. To address this big elephant in the room, why is it difficult to achieve decarbonization and implement the decarbonization targets?
Kirti: There are several factors to consider. Let’s break it down into five main categories. The biggest challenge that I find when working with organizations is the data. They do not understand exactly what the data is telling them and therefore they cannot capture their carbon footprint. There is an expression, you cannot reduce what you can't measure. Therefore, it's fundamental to try and engage the right stakeholders to understand the data, document the carbon footprint, and start the journey to understand the problem. The second reason is resource constraints, both in terms of capacity and capability. A lot of organizations are focused on their primary business objective of turnover or altruistic motives or whatever the focus of the organization is. Decarbonization and sustainability are new skills for them. Therefore, the resources that they have in the organization aren't necessarily skilled to take on this challenge, or they are balancing their day job and therefore cannot balance this in addition to their day job.
The third factor is that decarbonization is a challenge, in particular with regard to heat. These are complex solutions to decarbonize, with assets being installed, infrastructure needing to change, and the overall operating regime of the organization fundamentally having to transform. The complexity of these solutions requires those with a dedicated skill set to help them on this journey. These solutions cost money to achieve Net Zero. There is a cost involved and understanding how to invest, whether that’s their own capital, getting third-party finance, or getting support through funding mechanisms like loans or subsidies. Again, this is another area that's highly complex to understand.
Finally, it’s the accountability and the alignment of strategy to execution. Typically, you'll find, especially in the CDP report, a lot of targets have been announced at the C-suite level. But these have not been cascaded through the organization, to the lower level of the tactical management to implement. Therefore, there's a disconnect or an implementation gap between those that have set the strategic outcomes, and those that have to manage this in practice. It causes a disconnect and a lack of synergy amongst the organization to deliver this combined target together. I think trying to sort out these five things are fundamental to help enable the journey.
Clemence: Thank you so much for the clarity into those five challenges that you see companies have. I'd like to come back to the third point, you mentioned the complexity of solutions. So, what are we talking about in terms of decarbonization solutions? What are the technologies behind that?
Kirti: It's anything from quick wins to energy efficiency installations, such as lighting, building management systems, and air handling units where you can change the set points, replace the bulbs to give you more efficiency and outputs and reduce the maintenance involved. It also provides cost savings to on-site renewables where the generation output is volatile. You have to consider how this will be mixed with your existing energy supply. It also includes substantive generations, such as manufacturing or industrial centers, where you have to think about resilience and how having on-site generation coupled with your existing power supply.
Clemence: You mentioned that companies have difficulties accessing and interpreting the data. And they don't necessarily have the skills for decarbonization. What do you mean by that?
Kirti: With regard to data, typically, when you're mapping a carbon footprint, or you're coming up with a solution to decarbonize an organization, the first thing that you need to understand is the energy consumption. How much are you consuming today? How much have you been consuming over the last 12 months? Or even better, how much energy have you been consuming over the last 36 months? Now, sometimes this is a challenge because you must think about COVID and its impact. But what you're looking for is a year that demonstrates what a typical energy profile would be for your organization. Secondly, when you're looking at asset-based, long-term solutions to decarbonize your organization, having a view of which assets you own is important. For instance, do you have an asset register? Do you understand which buildings are yours that you hold complete accountability for? Which buildings are leased, and how long is the lease? Is it only five years? If so, only quick-win solutions can be implemented. Or do you have a lease for 25 years, allowing you to install on-site renewable projects?
Clemence: Regarding the financing aspect. You mentioned that new technologies might have to be installed to decarbonize sites or assets. Which means new CAPEX must be spent. So, what are the barriers to spending CAPEX and how can we remove those barriers?
Kirti: Financing is a huge challenge. The first question I get asked is, so who's going to pay for this? When thinking about funding, there are typically three high-level questions that need to be answered. One, should the organization invest itself? Two, what incentives or subsidies or tax-related incentives are available on the market to facilitate this decarbonization transition? Third, should they look to a partner to invest third-party capital, so that they can accelerate this journey?
When looking at these three in isolation, the first question that is considered is, what is the term in which they would like to invest this capital? Typically, when it's client finance, they're looking for short-term payback, so less than five years and in line with a medium-term plan or objective. Also, with client-owned finance, you have to think about the balance sheet impacts of having these assets on your books, which will affect your gearing ratio and your attractiveness to investors will be adverse. In addition, when investing your own capital, you're taking it away from your primary operations, your normal business activities. Therefore, these are key considerations when thinking about client finance.
Now, taxes and subsidies are also a good aspect to think about. So, in some areas of the world, like in the EU, there's the emissions trading scheme, where there are carbon avoidance savings that can be accounted for in these long-term asset base deals. In some organizations, this is a real cost. Commercial organizations can also consider it as a potential opportunity to benefit from doing it in the future. And thirdly, with third-party finance, the client can invest their own capital in their primary operations and has a funder that's an expert in this area and can provide advice on the best structure. And help you ensure that the savings that you're generating from these assets can offset the cost of the finance so that the cost to the client is neutral. So, all of these complexities need to be evaluated with key stakeholders from finance as well as the operational P&L holders in the room.
Clemence: Thank you for the explanation. You use the word as-a-service. What do you mean by that?
Kirti: That is a good question because previously when you used to buy energy, you used to buy as much as possible to support your business. An as-a-service or an energy performance contract incentivizes energy reduction or decarbonization. What I mean by this is, the more savings that you produce, the more you have available to offset the cost of finance, and the cost of investment in the assets, because the savings are used to pay for the funding. So, the more you save, the more you can invest in the future. Similarly, with on-site generation, the more solar output you produce, the more you can use that for newer technologies as they evolved through the term.
Clemence: So this creates a win-win situation for decarbonization.
Kirti: Exactly. And that is the key term, win-win, because the outcome that you want as a client is to reduce as much as possible, and you are incentivizing your partners to have a commercial benefit from you reducing your demand.
Clemence: To participate in decarbonization programs, I would guess that you need to engage different stakeholders or functions within a company. Who would they be?
Kirti: So, you have to engage everyone, which can be quite a scary exercise once you start thinking about it. But what I find works most effectively is when there's a defined strategy at the C-suite, but the strategy has been defined collectively with the site teams. So there have been CO2 champions that have defined the science that has contributed to this definition, and the P&L account holders, finance teams, procurement teams, and sustainability teams have all worked together to define this strategy. Now, ensuring that stakeholder engagement is maximized, requires a lot of careful planning, structuring of steering meetings, and effective program management of the plan.
Clemence: How is a program management approach helping to align these stakeholders who are at different levels?
Kirti: For instance, we were looking after a program with regard to on-site solar. In this program, there are 100 sites, all with mixed ownership. There were landlords, site teams, and CO2 champions all involved with ownership. Now in order to make sure that everyone was on the same page, and everyone had the same goal, we set up a clear governance structure so that there would be weekly country meetings at the site level to understand the progress of the solar program. We set up steering committees at the sort of strategic level with the C-suite and the key nominated sponsors so that we could meet monthly to report on the progress of the program and measure the performance against the underlying deliverables. We set up specific meetings with subject matter experts. For example, the real estate team to help us understand the management of landlords, and the procurement team where we considered coupling off-site PPA with on-site PPA. Through these structured meetings, we were able to accelerate the decarbonization of this client's estate through on-site solar. We had 100 sites with the potential of 138 megawatts. And through delivering this activity, we concluded with about 50 megawatts installed capacity through solar on-site physical installation. It requires a lot of process management to ensure that the information is communicated well, and it shows the decarbonization results in practice for the sites to manage day to day.
Clemence: In this example, the program was run over multiple sites. What is the benefit of having a grouped portfolio approach?
Kirti: This example had 100 sites, and what I didn't say was across 14 countries. You can imagine the complexity of managing 14 different types of contracts, and also looking at the economic benefits of a small site compared to a big site. What a portfolio approach gives you is the opportunity to cross-subsidize. Where you have one smaller site, you can use this site and couple it with a bigger site that has a higher savings potential. So, both projects win and get a decarbonization benefit. That said, there's a cost subsidy benefit there. You can also share carbon credits across these portfolios in Europe to help accelerate the wider organizational transition. There are wider economies of scale because local developers can work in multiple countries where they are present, and give you economies of scale to encourage additional solar output.
Clemence: Let's assume I work in a large company, and I'm the head of corporate sustainability or industrial performance. My company has set some goals to reduce greenhouse gas emissions. Where should I start?
Kirti: The first thing that I would do is combine a pool of stakeholders from all levels of the organization that may be impacted by this change. Have a meeting, an offsite, two-day workshop, and get everyone together to agree on a plan and a timeline. There's no point in decarbonizing and setting a target to get Net Zero tomorrow if no one is going to support you in this process. It's better to set a more realistic pragmatic target that engages the organization. Once you have this workshop or meeting to engage the stakeholders, take some time out to understand the data and involve some experts if you need support. Data, if managed effectively, will accelerate the transition because you can see the impact of your measures for the future.
Clemence: Thank you, Kirti.
Let's work together to implement your decarbonization strategy.