It has been just over a year since the UK Government committed to reach net zero greenhouse gas emissions by 2050 and the UK is already falling behind on achieving these targets. COVID-19 isn’t over but as organisations seek to resume and rebuild, the climate emergency must remain a top priority.
Since the onset of the pandemic, like so many others, energy firms have had to respond to the immediate challenges of keeping employees safe, maintaining continuity of operations, and continuing to service the needs of its customers. A necessary response, though one which has inevitably diverted attention and resources away from the climate crisis.
While the economic recovery offers an opportunity to build back better, organisations will need to contend with the financial and economic effects of COVID-19. They will need to balance the trade-off to improve near-term resilience and performance while providing the necessary focus and investment to progress net zero, energy transition and sustainability commitments. How energy firms continue to respond in the short term, and critically, how such a response underpins achievement of their longer-term environmental and climate-led imperatives, will determine their future success and their contribution to a sustainable future for all.
”How energy firms continue to respond in the short term, and critically, how such a response underpins achievement of their longer-term environmental and climate-led imperatives, will determine their future success and their contribution to a sustainable future for all.
From response to recalibrate
In the first half of 2020, organisations were consumed with determining an effective response to the initial outbreak of COVID-19. Having taken immediate action, now is the time for energy firms to chart a roadmap for recovery and to resume and rebuild. This doesn’t just mean functioning well through forthcoming periods of prolonged uncertainty, but recalibrating their businesses and accelerating the energy transition to avert the climate crisis.
Resume and rebuild
The energy industry has seen a lower rate of digital adoption compared to other sectors, such as financial services or retail. Nevertheless, the pandemic has forced energy firms to accelerate their digital transformation efforts, rapidly pivoting towards a digital-first mentality to maintain business continuity and resume operations.
Energy and utility firms have been facing two conflicting priorities for some time: reducing costs in response to regulatory pressure while also investing in new organisational capabilities. In the near term, continued exploitation of digital technology will allow firms to respond to market challenges, improve the efficiency of core operations, deliver better customer outcomes and enhance resilience to future shocks. Crucially, digitising core operations and lessening complexity is necessary to reduce controllable costs and free up capital for investment in energy transition initiatives.
In addition, responding to the evolving pressures and needs of the energy market requires leaders to regularly assess, challenge and adapt their operating models. In a recent Gate One survey of 300 senior executives, more than half of respondents saw greater organisational agility as the biggest driver of their transformation efforts, namely creating the mindset, capabilities and systems that enable businesses to respond faster, repeatedly and more effectively than their competitors when faced with ever-increasing disruption. How energy companies can leverage technology to maximise productivity and do more with less, reconfiguring their cost base such that it is aligned to current trading conditions, remains a key consideration in this period of resume and rebuild.
”How energy companies can leverage technology to maximise productivity and do more with less, reconfiguring their cost base such that it is aligned to current trading conditions, remains a key consideration in this period of resume and rebuild.
Energy firms remain at the heart of a sustainable future and they continue to play a vital role in driving growth, collaboration and adoption of energy transition across adjacent sectors.
Many major oil companies are increasing spend and diversifying into renewable and low carbon energy. Several of these companies have already announced large-scale restructures and investment plans to embrace new business models.
Recognising the need for alignment and collaboration, in December, BP, Eni, Equinor, Galp, Occidental, Repsol, Royal Dutch Shell and Total announced that they have jointly developed and agreed six energy ‘transition principles’ that underpin their contribution to the energy transition.1
While encouraging, the ambition and pace of change across the sector remains insufficient.
Most organisations recognise the need to accelerate their own understanding and response to the climate crisis. In particular:
- understand their carbon footprint and reduce energy consumption
- assess the maturity of current sustainability practices and performance
- educate employees on their behaviours and consumption habits
- engage across the supply chain – suppliers, clients and customers – to collaborate on net zero opportunities.
- consider how they can work towards becoming net zero in the workplace, across operations and in the delivery of services
- review the skills and capabilities the organisation requires to design, launch and extend new business models
- increase the scale and ambition of their climate change action plans and embed these challenging targets into their core business strategy.
This month, the International Energy Agency (IEA) announced that it will produce the world’s first comprehensive roadmap for the energy sector to reach net zero emissions by 2050. Expected to be published on 18 May, this will set out in detail what is needed from governments, companies, investors and citizens to fully decarbonise the energy sector and put emissions on a path in line with a temperature rise of 1.5 degrees celsius.2 Many hope that this roadmap will align organisations and create greater levels of certainty to help inform decision-making and unlock investment to deliver the net zero agenda.
Recognising the pivotal role that the energy sector holds for a sustainable future and the size of the challenge ahead of us, Dr Fatih Birol, the IEA’s executive director, commented: “The energy that powers our daily lives and our economies also produces three-quarters of global emissions. This means our climate challenge is essentially an energy challenge… Nothing short of a total transformation of our energy infrastructure will be required. That calls for decisive action this year, next year and indeed every year to 2050.”
COVID-19’s impact on the energy sector
- Lockdown has significantly reduced electricity consumption in the commercial and industrial sectors.
- Reduced demand over a prolonged period will likely keep oil prices down, increasing pressure on operating margins and discretionary capital expenditure.
- Increasing unemployment rates may prevent many people from paying bills, resulting in high delinquency and debt.
- Non-critical investments have been suspended throughout the sector – across generation, transmission and distribution.
- Supply chains for the power sector continue to be impacted, causing delays in bringing online the new generation assets which contribute towards net zero targets.
- New opportunities have arisen to accelerate the adoption of new ways of working in the wake of transforming business models.
- An increased emphasis on the health, safety and wellbeing of employees and customers
- Firms are discovering the changing needs of customers and rethinking their brand strategy.
- Recognising the need for more innovation to drive a more agile and resilient workforce.
Our transformation expertise means we are well placed to support you in diversifying portfolios and the shift to new business models in power generation and renewables.