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Strategically, businesses have to take stock of how far their business models, products and services are affected by climate change and the evolving social requirements, political influence and reaction from the financial world that it entails.
In short, they have to examine how promising their current strategy can remain. Comparing the current strategy with selected scenarios gauges its resilience and indicates whether changes are necessary to safeguard the success of the business as conditions change.
Analysing the climate risks and opportunities under various climate scenarios identifies business potential and risks to portfolios, supply chains, in-house production and products, and customer groups. It also offers a transparent way to analyse assumptions about market development, including under various global warming scenarios.
The analysis may show that your products, services and customer portfolios need to be modified or your geographical footprint changed, or that the prudent option is to shift to new technologies and markets. The analysis also highlights areas where a business has particularly good opportunities for success based on its capabilities, and is a key element in modifying the corporate strategy.
In December 2019, the EU laid out in detail its "net zero" agenda as a binding strategy to combat climate change. This ambitious goal is forcing energy suppliers to completely rethink their business models, operating procedures, supply chains and services.
Five strategies are particularly suitable as building blocks to help facilitate the transition to low-carbon energy:
In navigating the transition, clients frequently face the following questions:
Getting companies ready to face these future scenarios requires innovation along the entire value chain. It will not be long before new technologies, such as hydrogen or carbon capture become economically viable. Businesses must keep pace with this change and anticipate when these developments will enter the mainstream.
We leverage our in-depth expertise in the European energy sector and our market knowledge in the area of climate change to help you navigate the transformation.
Innovation, regulation and supply and demand mean that technological and economic systems are in a constant state of flux. The current transformation is moving away from primarily centralised fossil fuel power stations towards centralised and decentralised renewable power generation and storage facilities. This poses risks for the energy industry, but also creates opportunities.
Solar plants and wind farms have achieved significant cost degressions in recent decades, and this trend is now also becoming apparent in storage technologies. All intermittent renewable power generation technologies require storage solutions and sector coupling. Batteries and thermal storage, hydrogen and power-to-x (P2X) solutions are also gaining significance. A low-carbon energy sector enables a deep decarbonisation of various sectors, including industry and the transport. In addition to stabilising the energy system, they can provide sources of energy for steel production, feedstock for the chemical industry or aviation fuel.
Some countries, such as Australia, Germany and Japan have already developed a roadmap for hydrogen and P2X. Initial pilot projects are operational or are under construction and development. The experience gained from these local projects will contribute to cost degression at global level and will form the basis for the expected cost degression and competitiveness of "blue" and "green" hydrogen before the end of the decade. PwC supports businesses in the energy industry – not just in energy management but also in considering technological aspects. We have in-depth expertise in modernising, converting and expanding asset portfolios. Our global network gives us detailed market experience and supports us in local and international methods of generation.
Combating climate change is based on four hypotheses that underline the importance of energy efficiency:
Consequently, energy efficiency does not just mean "producing the same volume with less energy" but instead should be considered in the light of cost efficiency:
The high energy demand is a key driver for CO2 emissions in the processing industry. The footprint can easily be cut by reducing energy consumption, but ultimately this would involve curtailing production activities. The primary goal of the processing industry must therefore be to produce the same quantity using less energy, in other words to become more energy efficient and in doing so to improve its carbon footprint.
There are various options available to reach this goal: ranging from investments in more energy efficient equipment and installations, through avoiding energy waste, to the reintegration of energy currently being vented into the atmosphere. Against a backdrop of higher energy and carbon prices, the requisite investments in technologies and organisation quickly pay for themselves.
While pure energy efficiency relates to technical investments and their potential cost savings, cost efficiency addresses the best possible use of funds, grants and subsidies, and the identification of potential cost savings. More and more public funds are available to the industry at the national, European and global level. Most countries are increasing their grants and subsidies for the processing industry, with cost-cutting programmes in respect of taxes, levies and charges available in many places. The various opportunities have one thing in common: specific criteria must be met and applications completed on time and in full. With respect to cost efficiency, it must be decided whether the business will generate the energy itself or procure it externally ("make or buy"). Those deciding to generate it themselves may be eligible for subsidies; those deciding to procure it externally must optimise costs by means of professional tender processes and clear assessments of the markets and developments.
The future of power generation is carbon-free, and businesses and customer segments are increasingly looking to supply chains with zero-emission or substitution strategies to become carbon neutral. This is already causing disruptive changes in the energy segment, with growing pressure from various stakeholder groups to decarbonise. There are also major regulatory changes in the pipeline that will drive forward the end of carbon and create corresponding market incentives, notably as economic stimulus packages in the wake of COVID-19. This affects energy-intensive business models in particular.
An increasing number of businesses are pledging to combat climate change. More than 230 companies that have committed to 100% renewable power have now signed up to the RE100 initiative. In addition, technological innovation is improving cost structures, from production and operations through reduced electricity costs down to increased grid parity, making green electricity a profitable alternative.
The transformation in power generation cannot be avoided. It is happening rapidly and brings with it both opportunities and risks. The winners will be those who harness the opportunities created by this disruption.
New energy markets
As well as avoiding emissions, substitution markets are being developed. Power generation from green sources is becoming more readily accessible to many businesses and customer segments. Wind and solar energy in particular are playing an increasingly important role. A growing number of businesses are investing in renewable energy equipment to satisfy their own energy needs, or are doing so by means of power purchase agreements (PPAs). In parallel, we will soon see real-time trading become a reality in the market for renewables.
The changes taking place as part of the transition also have financial implications for power generation: the higher the share of renewables in the power supply, the more often renewables set the prices in trading. This can put pressure on electricity producers' margins. Further financial drivers include the change in subsidy and capacity payments or movements in the carbon price linked to the expansion of renewables.
Heading into the future
These developments have far-reaching effects for today's business models and the associated infrastructure. Electricity producers have to rethink their strategy and prepare for new energy markets. The key is to precisely understand the capabilities of their own businesses and the dynamics of the markets, and on this basis to develop an agile approach to transform the business model and operating procedures based on sustainability.
The critical success factor for businesses is not just to save energy and become more efficient, but to assign a financial value to emissions. The issue now is to prepare for these changes and seize the opportunities.
A company's portfolio of products and services determines its strategic positioning along the value chain and defines the competitive landscape. The energy market presents an increasingly fragmented environment in respect of traditional business models, from integrated manufacturers through up-and-coming specialists for the Internet of Things or data analysis, down to energy services firms. It is not just pure market potential that determines the appeal of a product or service offering, but also emerging customer preferences and the company's ability to offer these on a cost-effective basis. A good example of this is e-mobility, which is bringing sweeping change to the oil and gas industry, the energy sector and car manufacturers.
Sustainability has an ever growing role in efforts to comply with regulatory requirements, recruit qualified staff and live up to investors' expectations, and businesses have to adapt their products and services accordingly. The current key trends in the industry are to maximise renewables, optimise energy consumption and integrate waste and water management systems.
Our experts have in-depth knowledge advising on the right strategic positioning along the value chain and defining the resulting value propositions and market strategies. We also have extensive experience in adapting products and services to specific target customer groups and sectors.
Energy efficiency plays a key role in achieving carbon goals and its appeal is constantly expanding. Demand for electricity as an energy source is expected to increase across all industries, a development driven by decarbonisation goals.
The key drivers in the market are digitalisation, regulation and customers' economic interests. PwC's experts have a wealth of experience assisting companies in developing a detailed value proposition and market strategy and evolving into sustainable, energy-efficient businesses.
Today's energy and supply industry in Europe is being shaped by various megatrends, with implications for all industry players. Decarbonisation is being boosted by targets to reduce greenhouse gas emissions, and decentralisation is supporting local energy production by promoting power generation close to the customer. Added to the mix is digitalisation, which continues to drive forward the transformation in all industries.
PwC supports energy businesses worldwide to generate sustainable and differentiated competitive advantages for energy solutions in the B2B and B2C segments. To that end we contribute our deep insights into the market, competitors, key drivers and trends, and leverage our experience in developing successful strategies based on the strengths of a business and its opportunities and risks.
External reporting on climate goals should be heavily based on the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) and the non-binding Guidelines on non-financial reporting: Supplement on reporting climate-related information. It is important for businesses to identify and regularly monitor the right factors for managing their own climate goals. The above non-binding Guidelines on reporting climate-related information list both production companies and financial firms. The goal is to improve the comparability of information without losing sight of assessing materiality. Thus, "banks and insurance companies should focus on their Scope 3 GHG emissions, despite the well-known challenges". The TCFD is also playing a growing role outside of statutory reporting. For example, in addition to other market standards, the Principles for Responsible Investment (PRI) announced in early 2019 that the TCFD recommendations would become a mandatory part of the PRI reporting framework and thus explicitly supported adopting the TCFD recommendations for its members: "TCFD is a high priority for the PRI as they provide a global framework for translating information about climate into financial metrics". (UN Principles for Responsible Investment).
For internal management purposes it is essential to have the KPIs available at short intervals. This is the only way to track the achievement of set climate goals. It therefore makes sense for them to overlap as far as possible with the external KPIs in order to ensure uniform reporting with harmonised results.
Another useful idea is a dashboard that provides a given recipient within the company – from head of department through to management and supervisory board members – with a summary of KPIs and a comparison with the set goals, thereby visualising the progress made. The KPIs are on hand at all project steps, from strategy to implementation, ensuring a high degree of transparency from the outset about climate goals and the progress made in achieving them.