François Depierreux
Director, Sustainability Solutions - EMEA
Simona Dragoi
Senior Manager, Sustainability Solutions - EMEA
Decarbonization
Resilience
Net Zero
October 10, 2024
The pulp and paper industry (PPI) is among the top five most energy-intensive industries globally, responsible for 6% of global industrial energy consumption and 2% of direct carbon emissions. Over the past three decades, the PPI has significantly reduced its energy use and emissions through efficiency improvements, utilization of biomass and byproducts as feedstock, cogeneration, and increased recycling, even as production increased. Despite these sustainable advances, the industry’s carbon footprint remains substantial, the challenge of decarbonization remains formidable, and progress remains incremental.
Several factors are slowing the pace of the industry’s decarbonization, including technological, political, and economic challenges. Many technologies are not yet commercially viable and are not yet being implemented at scale. There is lack of consensus and cooperation on how best to decarbonize the PPI, unclear public policies, and regional forestry legislation which raises socioeconomic issues about resource extraction. However, the biggest obstacle is the financial burden.
For instance, the investment cycle for process and utility equipment is between 25-40 years, meaning facilities built around the turn of the century will still be operational in 2050. Unless they prioritize investments in critical upgrades, companies are likely to delay costly energy efficiency improvements, impacting decarbonization progress. The high upfront costs for transitioning to capital-intensive technologies, concerns about operational disruptions, and uncertainty about recuperating investments given the current environment further complicate corporate decision-making. Nonetheless, opportunities to ease this financial burden are within reach.
Overcoming Financial Hurdles to Decarbonizing the PPI
The Confederation of European Paper Industries (CEPI) in 2017 launched a roadmap that still serves as a guide. It estimates decarbonizing the sector by 2050 will require €44 billion in investments, including €24 billion for energy efficiency and innovative technologies, and €20 billion to expand the production of low-carbon, bio-based products. These figures reflect the European industry alone, which is often considered more sustainable than its global counterparts due to stricter environmental regulations, circular practices, and renewable energy use.
Securing financing will be crucial for companies to stay competitive in this evolving landscape. Several options exist, including internal funds, debt, and service agreements. Companies must carefully assess which funding approach best suits their situation:
Internal funds such as CAPEX budgets or dedicated decarbonization funds offer flexibility but can be complex and impact equity and earnings
Debt financing, including loans and bonds, allows for large-scale projects by lowering their impact on internal funds, but increases long-term costs and responsibilities
As-a-Service agreements provide companies access to services or technologies through outsourcing models that eliminate the need for large upfront capital investments. Rather than owning and managing the infrastructure or equipment, companies pay for usage or outcomes over time, often through performance-based fees. The service provider finances upgrades and typically handles operations and maintenance, enabling businesses to focus on core activities and reduce their operational risk.
The two most common models of as-a-service agreements are Energy Savings as-a-Service (ESaaS) and Utility as-a-Service (UaaS). These contracts reduce upfront CAPEX that often causes companies to delay decarbonization efforts, eliminate the long payback period on an investment, which can lead management to discard a project, and can also be off-balance sheet, preserving solvency and indebtment capacity for strategic projects. The main difference between the two is how the revenues are accounted for.
ESaaS focuses on reducing energy consumption and costs through targeted energy saving measures (ESMs). The provider is responsible for the installation, operation, maintenance, and financing of the ESMs, and is paid based on savings achieved. Energy is saved, emissions are avoided, the client saves money, and the service provider recovers their investment plus a margin. The better their solutions perform, the higher their margin.
UaaS focuses on providing a utility (electricity, heat, steam, compressed air, hydrogen, etc.) rather than reducing energy use. Given that the solutions are low-carbon and more efficient, such as replacing a gas boiler with a biomass boiler, energy will also be saved and emissions reduced, but the value lies in the low-carbon utility supplied. UaaS offers an outcome-based, comprehensive solution for an efficient utility service without a company shouldering the risks of running complex infrastructure.
Both solutions are part of the new wave of innovative financing and ownership structures emerging to overcome financial barriers and facilitate companies’ energy transition, enabling them to meet their sustainability commitments without compromising their core operations.
What is more, the savings on energy bills and transition costs can be substantial once an as-a-service program is rolled out over several or even dozens of sites in multiple countries. For example, one client in the automotive industry with hundreds of sites in 35 countries committed to reaching carbon neutrality on Scopes 1 and 2 by 2025, achieving 50% reduction of Scope 3 emissions by 2030, and carbon neutrality on all scopes by 2050. To meet the challenge, the client needed to change its usual ways of contracting energy projects and develop a strong partnership with an energy and sustainability transformation advisor. The ESaaS program developed for the client addresses more than 110 plants in 13 countries and will enable the company to achieve about 15% energy savings while reducing their energy-related OPEX.
In the PPI, an ESaaS program – perhaps with a solar photovoltaic array under a UaaS contract – will always make sense for offices and packaging centers, which are often more numerous but typically have lower individual energy consumption than larger production facilities. It will always deliver the benefits of energy efficiency, lower operational costs, and enhanced sustainability.
For mill sites, UaaS for large assets like biomass cogeneration (CHP) systems is particularly appealing. It not only saves the company several million dollars in CAPEX for system replacement but also accelerates the benefits of updating large-scale assets, such as significant energy savings and sustainability improvements. This makes UaaS an attractive option for mills looking to optimize energy management and reduce their environmental impact. Overall, this integrated approach supports the PPI's transition to more sustainable and cost-effective energy practices.
The ‘Take or Pay’ Clause in UaaS Contracts
A key provision in UaaS contracts is the 'Take or Pay' clause, which requires clients to pay for a minimum quantity of utility services, regardless of actual usage. While this ensures a stable revenue stream for service providers, it can deter companies concerned about overpayment if their consumption falls below the minimum – whether due to a change in business plans or even in the event of business closure.
To address these concerns, several strategies can offer greater flexibility and reduce financial risk, making UaaS contracts more appealing to companies and striking a balance between operational efficiency and financial security. Strategies that can mitigate these risks and tailor UaaS contracts to a company’s needs include:
Exit Clauses allowing termination under specific conditions, such as significant changes in the business or market environment.
Performance Clauses to mitigate payment obligations should the service provider fail to meet certain performance standards.
Flexible Consumption Models like pay-as-you-go or pay-per-use options to avoid minimum payment commitments regardless of usage.
Shorter Contractual Terms paired with renewal options that allow reassessment at the end of each term.
Volume Adjustments to the minimum volume commitments that reflect changes in business needs or market conditions.
Make-up Rights to apply payments for unused services to future consumption, providing a way to balance the ‘Take or Pay’ obligations over time.
Grid Connection Flexibility by connecting the utility plant (e.g., an onsite photovoltaic system) to the internal grid network, with an option to export excess energy to an external grid when the site’s consumption is insufficient to meet the contracted quantity.
Collaboration with an experienced service provider is crucial for negotiating the flexibility and managing the risks of standard ‘Take or Pay’ clauses, and to achieve a mutually beneficial business agreement between parties. By understanding and leveraging these alternatives, PPI companies can effectively manage their UaaS contracts.
Explore Innovative Decarbonization Financing
The high level of investment needed to fund the energy transition in an energy-intensive industry like Pulp and Paper confronts companies with complex challenges. To succeed in their decarbonization efforts, corporates need to rethink traditional financing strategies to support long-term decarbonization goals. Innovative financing solutions like ESaaS and UaaS offer viable paths forward.
With the right guidance from an energy service provider that seamlessly integrates assessment, advisory, financing, project management as well as implementation roles, PPI companies can successfully navigate this transition. They can achieve their sustainability targets without losing sight of their core business operations, striking a balance between environmental responsibility and business growth.
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