Fueled by economic stimulus packages, mass behavior change, and a rapidly shifting regulatory landscape, organizations face unparalleled opportunity to accelerate decarbonization in 2021. Who will capture it?
In the not-so-distant past, 2020 held tremendous promise in the eyes of sustainability advocates. It signified the milestone year for countless sustainability goals, marked the first year of ‘The Decade to Deliver,’ and offered numerous opportunities for global leaders to convene in places like Glasgow and New York to discuss climate action. In reality, 2020 became the year that many organizations fell short of sustainability targets; travel ground to a halt; large gatherings shifted to virtual settings; and companies made massive changes to their business and operating models. However, the pandemic itself has not entirely disrupted climate action; on the contrary, it has accelerated underlying trends and will unlock capital at the scale necessary to meet our low-carbon transition commitments.
2021 brings the year of Green Recovery, a climate-focused Biden Administration, mass mobilization of sustainable capital, and cost parity among some of the most critical decarbonization technologies. However, though conditions are prime to create sustainable value, our experts predict that, few will successfully capture it. Those that can navigate the complex patchwork of opportunities will emerge from the 2020 slump prepared to win the low-carbon energy transition.
1. Organizations will confront the scale of change
What’s happening: As organizations found themselves falling short of their 2020 goals, stakeholders grew ever more demanding. Ambitions increased. Lawsuits, boycotts, and voting action proved to companies and governments alike that the social license to operate will now be essential to their success, and it will require profound, transformative change to their business.
Fast followers will mirror first movers: Companies and governments that have recently announced previously unimaginable goals, like Microsoft, IKEA, and Morgan Stanley, have provided blueprints for those looking to follow in their footsteps. In 2021, we can expect rapid adoption at smaller, local organizations of policies now accepted as leading practices, such as carbon neutrality.
Rigorous frameworks will accelerate progress: As corporate reporting frameworks converge and guidelines like the EU taxonomy are established, businesses will face clearer, yet more stringent guidance defining ‘sustainable’ action. This consistency will allow organizations to move faster. ESG data will be more readily adopted as key business intelligence, companies will access funding more quickly; and shareholders will have increased transparency with a standard set of intuitive, material metrics.
How to capitalize: As more organizations set science-based targets, 2021 will be the year they get serious about the depth and breadth of transformation. Leaders will meaningfully address emissions spanning their entire value chain. Offsets, often seen as a questionable crutch today, will emerge as an important lever as more credible options become available. New offset markets will provide high-quality projects
that not only help meet near-term emissions objectives, but also provide lasting environmental impact and a compelling reputational benefit.
2. Local Energy Solutions Will Focus On Resilience And Affordability
What’s happening: In 2020, the competing crises of climate change and the pandemic had a significant impact on our power systems. Catastrophic wildfires drove unprecedented power outages. Energy consumption patterns shifted dramatically as more individuals worked from home. The adoption of electric vehicles and wind and solar power continued to accelerate, changing the composition of our grid. These coinciding sustainability trends are beginning to drive a new reality: one of clean, reliable and affordable power.
Investment in infrastructure will be a growth engine: Investment will flow into hardening critical infrastructure. The Biden Administration has committed to a federal investment of $1.7 trillion in clean energy and climate resilience over the next ten years, leveraging additional private sector and state and local investments to total more than $5 trillion. Likewise, countries across the EU plan to invest recovery funds in a range of clean, resilient infrastructure projects ranging from transportation to natural capital to circular economy.
Accelerated electrification of other parts of the energy system:With over 500 electric vehicle models expected by 2022 and heat pumps on a path to cost parity with natural gas, electricity’s role in total final energy will grow quickly and become the dominant form of energy consumption by 2050 – requiring much greater emphasis on electric grid resilience to run our economy.
Local electric utilities will face increasing pressures to re-invent themselves: Resilience was top of mind for utilities in 2020, as they explored rate-based mechanisms to support investments in local energy resources and addressed pressure from both regulators and customers regarding service costs and reliability. Forward-thinking utilities will use the challenges of 2020 to explore scalable new business models that demonstrate value to the consumer of microgrids, storage and other services that build stronger, intimate and more intelligent energy relationships with the consumer.
How to capitalize: Successful businesses and communities looking to thrive in a decarbonizing economy will act beyond simply securing long term zero carbon power contracts and instead demand smart, data-driven local energy solutions from their provider that work in symphony with bulk electricity supply.
As renewables and data become the new lifeblood of the energy system, it is time to reimagine the modern-day electricity grid – as a fluid, flexible and interconnected system where demand is matched to the volatility of supply, and both resilience and affordability are optimized using mass customized local energy solutions.
3. Green policies will shift economics further in our favor
What’s happening: Governments across the world have announced at least $12 trillion in stimulus funds, creating an enormous opportunity to accelerate investment in green technologies, shifting the cost dynamics of the transition. As costs of proven low-carbon technologies continue to decline, new regulations and stimulus funds in 2021 will further accelerate these trends and unlock the next frontier.
Incentives will accelerate adoption of proven technologies. Solar power schemes now offer the cheapest electricity in history (IEA) and global wind and solar capacity is expected to increase by nearly 70% by 2025 (IEA). Lithium-ion battery prices have dropped 87% in the past decade (BNEF), alleviating some reliability concerns that come with such high renewables penetration. Sensors and control technologies have also continued to decline in cost, dramatically increasing asset efficiency. Coupled with new policies that incentivize deep building retrofits, electric vehicles and related infrastructure, the economics of proven, clean technologies will only continue to improve.
New policies will unlock essential, game-changing technology. President-Elect Biden has pledged to seek $400 billion in U.S. federal spending for clean energy research and innovation. We can expect investment targeted at carbon capture utilization & storage (CCUS), grid-scale storage, decarbonizing industrial heat, nature-based sinks, renewable hydrogen and other green gases and biofuels. Similarly, the European Union also plans massive new investment, including 500 billion euros towards renewable hydrogen by 2030.
High-carbon alternatives will become more expensive. Anticipate regulations that shift the economics of carbon intensive assets as countries implement their commitments under the Paris Agreement commitments. Sure to have a major impact are: the emissions trading schemes in the EU, Japan, South Korea and China; the U.S.-driven phase out of fossil fuel subsidies in G20 countries; the bans on diesel and gasoline-powered vehicles; and EU and U.S. trade measures intended to protect domestic industries from more carbon-intensive international competition.
How to capitalize: New policies will significantly impact the business case for low-carbon energy transformation. Organizations building or revising decarbonization roadmaps should reevaluate cost assumptions to incorporate evolving regulations. Where technologies are proven today, invest. For emerging technologies, follow the investment, and evolve assumptions on an ongoing basis.
4. New sources of financing will unlock the largest projects
What’s happening: As financial institutions, investors and big business alike see the value in sustainable investment, the private sector will continue to play a critical role in funding large scale projects and unlocking emerging technologies.
Green bonds will resume growth, surpassing pre-COVID levels: After a dip in Q2, the green bonds market surged past $1T in issued bonds by the third quarter. As sustainability and COVID-19 recovery funds grow more inextricably linked, available capital will surge into the market, now with clearer guidance on how these funds can be used.
New business models will upend traditional thinking: New players are offering innovative contracts that address the high upfront capital barriers, while delivering operational savings and expertise to optimize complex, non-core assets over time. These business models will allow capital to flow immediately to projects, realizing sustainability benefits sooner and increasing overall returns.
Big business will double down on investment in hard-to-decarbonize areas: To unlock solutions that will be critical to their own decarbonization, companies like Amazon, Microsoft, Unilever, and Delta are investing significantly in the technology that will be foundational to their green growth.
How to capitalize: For years, companies and governments alike have slowed their progress by moving forward only with projects that met strict, narrow investment criteria, leaving the largest and most critical projects unfunded. As organizations tackle the next tranche, they should revisit financing strategies to fund a larger slate of projects at an accelerated pace.
People often underestimate how much reporting frameworks can accelerate change. If it isn’t clear whether your project will qualify as a ‘green investment’, that uncertainty itself will slow action. The clarity that the EU taxonomy brings will be an accelerant of change.
Mark Chadwick, Managing Director, Sustainability Solutions - UK & Ireland, ENGIE Impact, London
5. Collaboration over competition: Coalitions will thrive
What’s happening? Many organizations operate under the stifling influence of the zero-sum paradigm, a notion that for one company to ‘win,’ all others must lose. On the heels of unprecedented collaboration in 2020, organizations will be more likely to engage in non-competitive partnerships and strategic alliances to tackle the scale of change required of them.
Coalitions will strengthen inclusive multilateralism: As the world raced to develop a COVID-19 vaccine, we saw radical transparency between pharmaceutical companies, governments, and research institutions. In 2021, the forums that will govern recovery efforts will become inextricably linked with expert thinking on climate, and global leaders will put aside partisan interests to address our collective challenges.
Ecosystems will unlock the next decarbonization frontier: 2020 brought countless examples of competitors and organizations across value chains joining forces to design solutions to critical decarbonization challenges. These collaborative partnerships offer the funding, scale and collective expertise to accelerate progress on sustainable technologies such as carbon capture and green hydrogen. In the coming year, proven models of collaboration will provide a playbook on how partnerships craft contracts, communicate and innovate.
How to capitalize: With roughly 75% of emissions reductions coming from non-mature technologies (IEA), coalitions will play an invaluable role in overcoming significant barriers. Successful organizations will proactively scan their ecosystems and value chains to identify partners who can help them tackle the most material sector challenges. By identifying key barriers, such as scale, financing, or underdeveloped supply chains, organizations can map the key players in their ecosystem that can offer symbiotic solutions.
In hard-to-decarbonize industries, the challenges are so complex and wide-reaching that no single company can solve them alone. To successfully decarbonize, they will need to pursue partnerships that share the risk and reward.
Diego Ibarra, Managing Director, Sustainability Solutions - LATAM, ENGIE Impact, Santiago
2021 offers the unique opportunity to press the reset button on climate action, now with hindsight and widespread support to fuel our collective progress. While opportunities abound to accelerate the low-carbon transition, recovery will be complex, and each organization must carve its own path. Those that can plan strategically, invest wisely, and engage their ecosystems to take advantage of this opportunity will establish their trajectory for decades to come. Choose wisely.
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