Oliver Wyman on the greatest challenges to a zero-carbon energy system

After the Energy Transition Summit, Climate Action caught up with Oliver Wyman's David Knipe, Partner, Energy Practice, and Head of the Climate and Sustainability Platform, and Francois Austin, Partner and Global Head of Oliver Wyman’s Energy Practice, to discuss the greatest challenges to a zero-carbon energy system and the ways policymakers can be more effective in supporting and accelerating emissions reductions.

Oliver Wyman was the headline partner for Climate Action’s Energy Transition Summit. As a global company that operates across a wide variety of sectors, where do you see the greatest challenges to a zero-carbon energy system currently? And how can cross-sector collaboration help to overcome these barriers?

DK: One thing to remember is that the world is electrifying. This is good because we're trying to move away from things like traditional hydrocarbons and towards electricity. But the challenge I see is that the electricity generation in different grids around the world isn't expected to change rapidly enough. We’re not going to see a significant reduction in carbon emissions from coal until we get onto a greater balance of renewables. So that’s first major challenge. Our next challenge involves working with all the really hard to abate sectors, such as heavy industry and transportation. Solutions like hydrogen do offer future zero-carbon solutions to these, but we’re a long way from them being commercially viable and globally delivered so there’s going to be a huge amount of infrastructure and spending required to achieve that.

Oliver Wyman’s recent report with CDP Europe showed that a large number of European corporates’ emissions reductions will fall well short of the Paris Target. Is the goal of a net-zero economy being approached with enough urgency? What do you think are the top three things that can be done to accelerate the transition?

DK: I think it is being approached with urgency by some, but I don't think it is being approached with enough urgency by most. The CDP report highlighted that only 15 to 20 percent of Corporate Transition Plans were aligned with a Paris two degree target, let alone a 1.5 degree future. However, I do see a lot of impetus coming from the financial services sector and their commitments to green loan portfolios, which will put pressure on the corporates and facilitate change. What we really need is thoughtful collaboration between financiers and investors to start holding corporates accountable and support them along the way. The world not only needs energy, but it needs cleaner energy, and that will require us to transition smartly without breaking economies or leaving people in energy poverty.

In the last few weeks alone, it’s becoming increasingly clear that financial institutions are looking for green investments to align their spending with the Paris targets. Do you feel there is enough opportunity for financers to encourage and invest in the global energy transition? And if not, what can be done to unlock this financial potential?

DK: The short answer is there is plenty of future opportunity out there, but I don't think it is being presented in sufficient quantity. Some people are innovating and investing into renewable technologies, such as hydrogen and carbon capture and storage (CCS), but I don’t think they’re going to be able to do so heavily until some pilot opportunities have been demonstrated and proven to work. It’s also a case of getting the right policy support to allow investors and shareholders to have confidence in their investments. I see no limit to the amount of opportunity that will come from green energy over time, but we need to de-risk and accelerate the opportunity so that capital can be deployed.

FA: I totally agree that there’s no shortage of opportunities out there. I also think it’s interesting to look at the banks, most of which have made a number of 2030 and 2040 commitments. I think the biggest opportunities, which the banks are not pursuing as aggressively as they could, are the new range of companies which are looking for scale-up capital, as opposed to start-up capital, which will need a huge amount of financing to get up to scale. For example, if a business is looking to get to the next level of investment within the electrification of light industrial vans or buses, or they’re looking to implement grid storage at scale, the next tranche of investments they require is going to be huge. I think these present themselves like ‘energy unicorns’ as opposed to the ‘tech unicorns’, and are a real opportunity for banks, but it will be interesting to see what the banks need to do to equip themselves for this community.

DK: I would add that in many bankers I have spoken with recently mention that they have fairly limited knowledge and understanding of many of these energy companies, and the technological opportunities. So it’s vital they invest time to educate themselves and to partner with these players in order to learn and grow. Energy requires a different degree of understanding of the technicalities and the practical implications, but it will be a massive investment opportunity I’m sure.

Governmental support is fundamental to the transition, and we are beginning to see more policy action (e.g. EU Green Taxonomy came in last year). In what ways can policymakers be more effective in supporting and accelerating emissions reductions?

DK: My main suggestions would be boldness, clarity, consistency, and certainty. I've just done a piece of work looking at biofuels in Europe, and there are two different uncertainties there. One involves understanding where all the regulations are going to be in two years, five years, and even ten years etc. It’s about understanding what goals each individual nation in Europe is going to set for itself. And it creates uncertainty in the very demand for the product itself, even if the product is good. And then you've got the uncertainty on the other side, such as caps that might be put on different feedstocks that could be used to create the product. So if you're an oil and gas company looking to develop biofuels, without governmental backing and certainty, you have a lack of clarity and therefore a trickier investment environment that is needed to really support it.

FA: I agree, and I think the perfect example of the boldness and clarity that David talks about came from the UK Government with their decision to ban the sale of new combustion engine vehicles by 2030. This sends a very clear signal. This clarity is crucial because uncertainty makes it very difficult for people to invest. I also think with regards to politics it will be very interesting to see how things will shift. In Germany, for example, the Green Party could become the dominant party and Merkel’s successor could be a green politician. It will be interesting to see what the impact of this will be. I think there’s a generation of politicians who are now beyond writing policy and really want to enact it and drive it through. I think we’re going to start to see a different side of politics as a new generation moves into global leadership positions.

DK: Just to add to that, we’ve talked about the EU, but we’re also heavily reliant on other nations who are going to be contributors to carbon over the next decade. I think we are going to need more diplomacy and collective action, such as COP26, to create an environment where we can all support each other.

Throughout the Energy Transition Summit we repeatedly heard that technology will be crucial for the transition, but the IEA have reported that many of the technologies we will require are currently only at demonstration or prototype phase. What support is needed to progress and aid technological innovation and implementation?

DK: The ones that come to my mind are things like hydrogen and CCS. I think it’s good for these technologies when coalitions like the Oil and Gas Climate Initiative (OGCI) come together and lead demonstration projects that try and move these initiatives over the hurdle. I also know from my former days in industry that if you don’t have a carbon price that’s around $100 per tonne, the economic reality of these projects is a challenge. I do share the IEA’s concern, but if governments can get behind these projects and show support, whether through a taxation or something else, that will allow these technologies to be brought further down the cost curve faster.

FA: I also think there are differences and challenges in the scaling of innovation. In Europe, we took great pleasure in our development of renewable technologies, and the patenting of these, but it was actually the Chinese who then took the technology and built enormous industries and now dominate the manufacturing capability. The US will be an interesting one to watch with Biden’s new incoming commitments, which the banks are also getting behind, and their ability to innovate and research as well as scale the manufacturing. I think there is going to be an enormous acceleration in the clean technologies space, driven by the US’s commitments to the climate agenda.

Countries that are still developing their economies present some of the largest challenges in the energy transition – something that David touched on in his session. How can we support emerging markets (especially those dependent on fossil fuels) towards cleaner energy sectors, whilst also ensuring they receive the same development opportunities?

DK: The challenge here is that we must not forget the supply side economies that are dependent on the revenues associated with their nation's hydrocarbon resources, but we also need to help them get away from those over time. Sometimes we forget the benefits we enjoy as Westerners with heating in our homes, fresh running water, and 24/7 power. But then if you think about India, for example, many people rely on wood-burning stoves, and many don’t have heating systems or power at all. We have to remind ourselves that those economies which are undergoing massive population growth need energy – we can’t strand them in energy poverty. So I don’t think we need to worry about things like gas becoming the next pariah, but instead we should allow economies that could use gas as a bridge to hydrogen to do so, instead of holding them to a higher account. 

DK: For me I think the support comes when we recognise the energy realities of individual countries and work collaboratively to help them progress fast enough for the transition, recognising the steps they may need to take on that journey will be different to ours, because of where they're starting from. If they can leapfrog technologies and go straight to a greater share of renewables that’s the best option, but we shouldn’t make a pariah of things that might help them get to where we need to be by virtue of them starting further down the track.

The Energy Transition Summit was part of Climate Action’s Roadmap to COP26, so as we look towards COP with renewed ambition, what is one key thing that you each see as critical [to be done] over the course of the next decade?

FA: I would say it's around leadership. I think we've heard a lot in the last two to three  years about the promises people are making for 2030, 2040, and 2050, and beyond,., but a lot of the people who are making those promises will not be there in 2030, 2040 and 2050 to deliver on their promises. One of the big shifts I’d like to see at COP is to start asking what it is we’ll be doing, practically, as leaders of energy companies, technology companies, and advisory firms, over the next three years to get us on the right trajectory for the articulated promises. My concern is that all of the big statements about what we want to do have been said and done, and now we need to start committing to practical solutions within the lifetime of our tenure as leaders.

DK: I’ll just add that we need action and evidence that we’re making progress. There has been more than enough talking. It’s time to demonstrate and get into action.

How did you both integrate sustainability into your career path, and why does this topic hold meaning to you personally?

FA: I think at a personal level there are two things. One is I'm the father of three children, and there is a sense of responsibility there. I've had a career that has been very focused on profit and I whilst it is still the commercial engine that drives the allocation of funding, I do feel a sense of responsibility for another generation. We need to think more carefully about the planet and people. And then on a different note, I climb a lot and I can see in places like the Alps and Nepal the very physical differences that have occurred over the course of the last 30 or so years. But on top of this changing physical landscape, you also realise there are communities that have been there for thousands of years who are now facing droughts in certain valleys, meaning they can’t farm or irrigate in the way they once could. When you’re climbing there is a sense that this isn’t right.

DK: I don't climb like Francois, but I do have kids and there is a sense that this is the right thing to do for them. I agree that business shouldn't be all profit, but it should be sustainable, profitable, and good business. I've got into this partly through thinking about my children, but also, ironically, from  having worked in the oil and gas sector. I’ve spent the last 10 years thinking about what the gas industry wants to become in the future, so have been part of a company wanting to make a difference and shape energy for the future. If we're going to grow economies, lift people out of poverty, and all prosper we need lots of energy, but we need it to be done in a clean, sustainable way. That’s a huge, exciting challenge, and it's something I'm passionate to work in. It's the reason I'm back with Oliver Wyman to do just that and help other companies to do that too.

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David Knipe and Francois Austin spoke at the Energy Transition Summit in May. Missed it? Don't worry, you can now watch their sessions on demand by clicking here.