FORESIGHT Climate & Energy Autumn/Winter 2022 by FORESIGHT Media Group

Climate & Energy

Unleashing climate finance

POLICY

FINANCE

POLICY

BUSINESS

Power shifts in the world order

Convincing Big Oil to pay

Where to cut the red tape

Community funds for the transition

PAGE 6

PAGE 22

PAGE 30

PAGE 58

THE MONEY IS AVAILABLE IF IT CAN BE USED EFFECTIVELY

Time to show courage in the energy transition

FORESIGHT Climate & Energy AUTUMN / WINTER 2022

PUBLISHER FORESIGHT Media Group

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EDITOR-IN-CHIEF David Weston david@foresightdk.com

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For all of the bluff and bluster that surrounded the COP26 climate negotiations in Glasgow in November 2021, very little was achieved in securing a pathway to limit global warming to below 1.5°C. In the intervening 12 months, the energy transition has taken a hit with the ripple effects from the war in Ukraine—and the pandemic—affecting supply chains, power prices, investor confidence and political bandwidth. This has led to very few countries strengthening their climate commitments, despite promising to do so in Glasgow. Ahead of the COP27 talks in Sharm El-Sheikh in November 2022, the UN warned that the world is “still nowhere near the scale and pace of emission reductions required”. Meanwhile, the International Energy Agency’s (IEA) annual World Energy Outlook report predicts global carbon emissions from the energy sector will peak in 2025 due to the increases in government spending on clean fuels in response to the conflict in Ukraine. The IEA’s conclusions indicate that the money for the energy transition is available, and it seems the willingness of lawmakers, businesses and citizens to adapt in order to make the transition a reality has increased with the plethora of crises blocking the path to a decarbonised economy. For this issue of FORESIGHT Climate & Energy, our 15th special print issue, we start with the assumption that the funds for the energy transition are available. The money to shift to net zero is there. What is needed now is the removal of the barriers and adaptation to the challenges so that the funds can be unleashed to accelerate projects and initiatives required to cut emissions sufficiently by 2050. In these pages, we examine how carbon pricing can be an effective tool in funding low-carbon endeavours but only in alliance with supportive policies and regulations. We look at whether the oil and gas majors—with the deep pockets and knowledge of the energy landscape—can do more to support the transition. We also examine what all this means for the geopolitical landscape of the world and how that will affect where the money goes. The lesson we can take from this special print issue is the need for everyone in the sector—investors, regulators, lawmakers, and developers—to be braver. There are many opportunities afforded by transitioning to a low-carbon economy, which will only diminish the longer they are left unexploited. The whole sector needs to be more ambitious in its targets, bolder in its risk-taking and more courageous in its actions.

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David Weston EDITOR-IN-CHIEF

CONTENT

POLICY

BUSINESS

FINANCE

TECHNOLOGY

A NEW WORLD ORDER

MOBILISE FUNDS NOW TO AVOID THE BIG CHEQUES

CONVINCING BIG OIL TO PAY FOR THE ENERGY TRANSITION

ALL DAY, EVERY DAY

As long as funding targets are missed, the more expensive the energy transition will be

The oil and gas majors have the money and expertise to pay for the transition—so why don’t they?

Power is shifting—not just in terms of the electricity used but also the influence of nations PAGE 6

PAGE 14

RED TO GREEN: WHERE TO CUT THE TAPE

Administrative barriers are holding back renewables growth and investment PAGE 30

Matching energy use to the hour is complicated but could also lead to huge investments in renewables PAGE 42

PAGE 22

COMMUNITY CASH TO BOOST THE TRANSITION

NOT A SILVER BULLET

Alternative ownership and funding models help include the locals in the energy transition

Carbon pricing is seen as a key ally in funding the transition— but it cannot do it alone

PAGE 58

PAGE 48

WILL THE UK’S PERMITTING REFORMS SPEED UP OFFSHORE WIND DEPLOYMENT?

A look at how the UK is trying to remove permitting barriers to accelerate new projects PAGE 38

FORESIGHT

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SDGs

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TEXT David Weston PHOTO AerialPerspective Works, Vlad Gansovsky and Yuangeng Zhang

POLICY

A NE W WORLD ORDER As the energy landscape changes, so too could the geopolitical spectrum. Nations that have derived power and wealth from coal, oil and gas face an adapt-or-die moment while countries with the natural resources central to decarbonisation could find themselves holding more cards. Businesses will also need to consider their investment activity accordingly

FORESIGHT

POLICY

t is often said that some of the major conflicts of the past 50 years have been over oil and the security of supply, demonstrating that geopolitical and energy issues are inextricably linked. This has never been more evident than in a turbulent 2022, as Russia’s unprovoked invasion of Ukraine sent already-climbing energy prices spiralling even higher and politicians around the world searching for alternatives to Russian natural gas and answers to their energy security challenges. The necessary transition to a decarbonised economy risks being jeopardised by geopolitical fallout while at the same time the transition itself represents a threat to the status quo.

concluded that all nations should prepare for the changes brought about by decarbonisation. “A state’s relative position in the international system is influenced by a range of attributes, including its gross domestic product, population, land size, natural resources, geostrategic location, military resources, and ‘soft power’,” the Commission’s report says. “Having control over and access to significant energy resources and markets is an important asset because it enables states to protect vital national interests at home, and leverage economic and political influence abroad. States without such assets, by comparison, have less leverage and are more vulnerable,” the Commission’s report adds.

RENEWED FOCUS The war in Ukraine has both helped and hindered the energy transition. Germany’s decision to expand its coal production and the European Commission’s move to secure a supply of liquified natural gas from other sources, for instance, are not in keeping with the aims of the Paris Climate Accord from 2015 to limit global warming to well below 2°C. However, the fallout has also focussed minds more than ever on energy security, distributed supply and energy efficiency. “Is the energy transition causing or impacting geopolitical events or are geopolitical events impacting the energy transition? It goes both ways but not necessarily at the same time,” says Thomas Boermans from E.ON, a German power company. Boermans acknowledges that today’s energy system is changing as a direct result of the conflict—not always in a positive way in the context of the energy transition—but he also believes one consequence of the crisis is that people’s readiness to make necessary changes has increased. “People now recognise we need to talk about saving energy and [reduce] resistance to renewables projects,” he adds.

BALANCE OF POWER Reaching net-zero emissions will require a transformation of the global economy. As people and their governments take steps to slash emissions, the flow of money, private investment and power will also shift. “Renewable energy will not merely influence the balance of power between countries. It will also reconfigure alliances and trade flows, and create new interdependencies around electric grids and new commodities,” writes the Global Commission on the Geopolitics of the Energy Transition. The Commission was formed by the International Renewable Energy Agency (IRENA) in 2018 and is headed up by former Icelandic president Ólafur Ragnar Grímsson. In 2019, the Commission released a report which 8

“Old kings can be new kings as long as they invest wisely”

ADAPT OR DIE The changing energy landscape means countries with a history of oil and gas production need to adapt their economies to retain income and influence. “Fossil fuel-exporting countries may face instability if they do not reinvent themselves for a new energy age; a rapid shift away from fossil fuels could create a financial shock with significant consequences for the global economy; workers and communities who depend on fossil fuels may be hit adversely; and risks may emerge with regard to cybersecurity and new dependencies on certain minerals,” the report warns. These countries—fundamentally the members of OPEC—may use their oil and gas profits to pay for their energy transition. “You see this with countries that have and export large amounts of fossil fuels. They know that there are limits to earning money on fossil fuels. What they’re doing is cashing in on the ‘Last Man Standing’ philosophy and starting to invest in green hydrogen production” and related facilities,” says E.ON’s Boermans. “Especially if these countries have possibilities for wind and solar, it is very likely that they will use the money they earn on fossil fuels, and currently they are earning billions.” Private enterprises will also face similar challenges with the energy transition. Companies that rely on fossil fuels—or even just profit from them—will need to adapt and find new business models, new business partners, and new markets in which to do business. All this while also navigating a potentially challenging geopolitical landscape. “The same goes for oil maFORESIGHT

POLICY

Dependent on energy

SOURCE: World Bank

Percentage of GDP from fossil fuel rents (average 2007-2016)

Mongolia Russia Trinidad and Tobaggo Uzbekistan Kazakhstan Brunei Darussalam Alergia Chad Syria Iran United Arab Emirates Gabon Azerbaijan Qatar South Sudan Equatorial Guinea Turkmenistan Angola Timo-Leste Oman Congo. Rep. Saudi Arabia Iraq Kuwait Libya 0%

10% Oil

Coal

20%

30%

40%

50%

60%

Gas

jors, they have the initial resource and can now earn a lot of money. And then let’s say with money, you can do everything. So that holds in itself the notion that old kings can be new kings as long as they invest wisely,” Boermans states.

NEW GAME, OLD PLAYERS The energy transition will democratise the world more widely, with new countries able to be responsible for their power generation—perhaps for the first time since industrialisation. Still, as Boermans points out, countries that have held the power in modern times could seek to retain their influence as major economies adapt to the new reality of the energy transition, with potentially damFORESIGHT

aging consequences for the energy sector. Industry observers are warning of a new cold war in which instead of collaborating on energy matters, the world’s major economies enter an arms race of technological hardware and software, including components central to the energy transition. “The energy industry, like other industries, must consider the impact of geostrategic rivalries, specifically in the procurement of essential hardware and software. This includes make-or-buy decisions for mission-critical components, products and services,” warns E.ON’s trend radar warns, which looks at topics and issues that could affect the energy sector in the future. “For customers of energy services, it will be important that systems comply with, operate and 9

POLICY

SUPPLY CHAIN Instead of wars over oil and gas then, conflict could arise as countries seek resources for the energy transition—particularly, rare earth metals for batteries and solar panels which only exist and are manufactured in a few select areas of the world. “China has a dominant role in the manufacturing of clean technologies. It accounts for three-quarters [of the manufacturing market] for solar modules. In EV batteries it is roughly the same,” Hammelehle says. This limited source of components leaves the potential for conflict—hot or cold—and further delays to decarbonisation pathways. “Let’s think of a case where sanctions are planned to be imposed (for whatever reason) on a country that is crucial for delivering materials, products or know-how for the global energy transition. You would jeopardise your energy transition in almost all of the countries,” says Boermans. “This requires new compromises and definition of red lines.”

China dominates technology supply Market supply shares for green technologies in select years

73% 16% 9%

63% 22% 8%

EV and storage battery production capacity

2022*

*Projections for 2022

32% 11% 8% 49%

2017

Wind turbine supply

2019

Solar photovoltaic module production

71% 24%

HOME SECURITY To lessen the dependency on Chinese industry, Europe and the US are taking steps to expand production and diversify supply chains. But this entails additional costs—and another threat to the energy transition. “China is incredibly strong and the US and Europe are trying to catch up. If the US and Europe try to foster the sort of domestic production capabilities, it will be more expensive. And the concern is that this reduces the pace of deployment of green technologies.

EV and storage battery production capacity

2017

3% 2%

CHINA

FORESIGHT

OTHER

SOURCE: Allianz Research

can be sourced also under changing geopolitical situations,” it adds. The ongoing trade war between the United States and China may escalate as both nations flex their financial muscle and adopt strategies with clean energy at their core. In its’ Top Risks 2021 report, Eurasia Group, a political risk consultancy, says, “As the US scrambles to catch up to China in what will quickly become a global clean energy arms race, it will make climate and the energy transition a matter of industrial and national security policy.” Julia Hammelehle of the Munich Security Conference (MSC), a forum for debate on international security, notes that China already dominates the supply chain for many of the materials and components essential to the energy transition, with Europe and the US looking to catch up. “We could hope that countries with strong potential for solar and wind would be more self-reliant. But the potential for renewables alone is not sufficient. Access to technology and capital is key,” says Hammelehle.

POLICY

Limited supply Europe and the US are trying to boost solar production capacity to counteract China's dominance

I think this is a very important geopolitical aspect to it as well,” Hammelehle says. “Vulnerability towards China is still very high and it will remain high in the foreseeable future,” Hammelehle adds. “This is also the case for critical minerals needed for these technologies. China’s position is particularly strong in processing operations [more than in mining]. For rare earth elements, for example, China accounts for over 90% of global processing,” she says. Europe and the US are looking at establishing production for these key elements of the energy transition but have some catching up to do. “The EU’s solar cell production capacity stands at only around 0.8 gigawatts (GW),” says trade association SolarPower Europe. Meanwhile, China’s total annual solar cell and module production capacity is reportedly set to increase from 361 GW at the end of last year to up to 600 GW at the end of 2022. “China has invested over $50 billion in new PV supply capacity—ten times more than Europe—and created more than 300,000 manufacturing jobs across the solar PV value chain since 2011,” according to the International Energy Agency. SolarPower Europe, EIT InnoEnergy and companies involved in the Solar Manufacturing Accelerator, have launched the European Solar Initiative, which FORESIGHT

looks at the industrial readiness of the solar sector and supports new investment into solar manufacturing projects, with the aim to establish around 20 gigawatts of manufacturing capacity in Europe by 2025. “Researchers are looking for batteries that need less rare metals, to be more efficient, to be cheaper, but to also be less dependent on the current countries or companies. It needs new agreements, new friendships,” Boermans notes.

NEW ARRIVALS As governments adapt their economies to the fight against climate change and maximise their resources—while boosting energy security—other nations could see their influence on the global stage increase. “We will be seeing a new set of players come into the new energy ecosystem,” says David Burns of Linde, a German industrial gases and engineering company. “Regions with access to renewable energy and carbon sequestration sites—here we see places like North Africa and Australia—have the potential to position themselves as important players. “In addition, countries that enjoy access to substantial renewable energy sources can now play a significant role in the clean energy market. In this category, we find places like South America, South11

POLICY

ern Europe and South Africa. All in all, there is a real opportunity for a more equitable energy ecosystem in the future,” Burns adds. The Global Commission on the Geopolitics of Energy Transformation report identified the types of countries that could emerge as new renewable energy leaders. Firstly, countries such as Australia and Chile could gain influence if they can export their huge renewables generation potential as electricity or fuels. “Australia’s economically demonstrated solar and wind energy resources are estimated to be 75% greater than its combined coal, gas, oil and uranium resources,” the report says, adding that these countries’ remote geographical location might hamper exports. Laos and Bhutan also export a lot of their renewable energy regionally. Secondly, mineral-rich countries such as Bolivia, Mongolia, and the Democratic Republic of Congo can grow influence as part of the value chains necessary for renewables technologies. MSC’s Hammelehle agrees that more countries could find themselves influencing global geopolitics as they flex their energy transition muscles. “We will 12

have more players on the field, not only countries with renewables resources but also those that have materials needed for green products and technologies. While others will assume a leading position in new energy sources such as hydrogen or in the manufacturing of key technologies such as electrolysers. But it’s still very open how these trade networks will evolve,” says Hammelehle. As part of their plans to set up their own processing and manufacturing facilities, Europe and the US should work with these countries with natural resources to also improve the lives of their citizens. China is often criticised for ignoring human rights abuses in its quest for raw materials. “[Europe and the US] have to work on being a better alternative for countries in the Global South to partner with,” believes Hammelehle. “They have to make sure that the local communities are profiting from the resources as well and want to partner with Western companies. We are highly critical of Chinese companies, and rightly so because there have been grave human rights concerns and environmental concerns. But western companies haven’t always been that great either,” Hammelehle adds. • FORESIGHT

Rare metals Sourcing of minerals may become a flash point in the coming years

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BUSINESS The cost of the energy transition as it stands is astronomical. But the returns are even greater. The longer investment targets are missed and policy frameworks are neglected, the pathway to a decarbonised economy becomes longer and more expensive. Added support for the developing world is also needed

he global opportunities for financial returns are vast. As former Bank of England governor Mark Carney has said, a net zero emissions future will allow banks, fund managers and insurers to invest in private sector plans and profit from the “greatest commercial opportunity of our time”. He added, in an address in 2020 at the Green Horizon Summit in London: “Building a sustainable future will be capital intensive after a period when there’s been too little investment. It will be job heavy when unemployment is soaring.” Carney has been a UN special envoy for climate action and finance since 2019. Investment in the energy transition is trickling. In 2020, investment for all energy was $2.5 trillion, with $1.4 trillion of that in clean energy, says Jonathan Coppel, an economist and head of the International Energy Agency’s (IEA) energy investment unit. Clean energy investment has been accelerating for the past several years. Since 2020, overall growth has been 8% per annum, Coppel says, while clean energy’s growth has been 12%. Energy use accounts 14

for 83% of the CO2 emitted across energy and landuse systems, according to a report by McKinsey, a consultancy. Meanwhile, asset financing for renewable energy, electrified transport and electrified heat—the funding of projects and infrastructure—was $471 billion in 2020, according to the latest Climatescope report from BloombergNEF, the energy research arm of financial media service Bloomberg. This was up 11% from 2019 and annual volumes have more than doubled since 2013, it added. Renewable energy accounted for 60% of that total in 2020. China, the US and Germany accounted for over half of 2020 investment. Not surprisingly, China, at $144 billion, was nearly a third of the total. The US followed at 17%, down from $84 billion in 2019 to $79 billion. Meanwhile, at $27 billion, Germany provided a 6% share.

SLOW CHANGE However, this investment is not enough. Gillian Lofts, the global sustainable finance leader at EY, a professional services firm, notes an estimated $32 trillion in FORESIGHT

Road to green Nearly a third of renewable energy investments were made in China in 2020

TEXT Ros Davidson PHOTO Lad Hara Caingcoy, Yiran Ding and Alejandro Luengo

Mobilise funds now to avoid the big cheques

FORESIGHT

BUSINESS

investment will be needed by 2030 and $92 trillion in the subsequent two decades to reach net zero by 2050. She recalls that Carney called for $190 trillion by 2050. This includes investment for the circular economy, efficiency and adaptation as well as the energy transition. By 2030, energy-transition investment would need to be $3 trillion a year to keep the world on track for limiting global warming to 1.5°C, says the IEA’s Coppel. This is more than double the amount in 2020, he notes. For a net zero scenario in 2050, more than $4 trillion per annum in investment until 2030 is needed, says IEA. “The pace certainly needs to pick up. We also need to avoid a massive uptake in fossil fuels,” says Coppel.

It is in much of the developing world that the influx of money—private and public—is lagging. The cost of capital in the global South is higher, financial systems are less developed and public financial institutions must play a greater role in de-risking investment. Annual clean energy investment in emerging and developing economies needs to increase by more than seven times—from less than $150 billion in 2020 to more than $1 trillion by 2030 in order to put the world on track to reach net-zero emissions by 2050, according to the IEA. Developing and emerging economies may account for two-thirds of the world’s population but attract only one-fifth of investment in clean energy and just one-tenth of global financial wealth, the IEA adds.

RISK AVERSION

The energy transition is often seen as overly costly in economic terms, according to a number of individual forecasts. The 2022 Sixth Assessment Report of the United Nations Intergovernmental Panel on Climate Change estimated that the additional cost of decarbonising the energy system to have a greater than 67% chance

However, it is not the appetite of investors that is an issue, but other real and perceived risks. “Renewable energy projects are capital-intensive compared with oil and gas and are especially sensitive to politics and policy risk in a country,” says Sonia Dunlop at E3G, a London-based climate NGO. 16

COSTLY TRANSITION

FORESIGHT

Funding mismatch Investment in the developing world is lagging behind

BUSINESS

Investment inbalance Climate investment is unfairly weighted towards developed markets

$ billion

DEVELOPED MARKETS

150

120

2020

2018

2016

2014

2012

2010

2008

2006

DEVELOPING MARKETS

150

120

OVERBLOWN PREDICTIONS

Wind

Biofuels

Solar

Small hydro

Biomass/ waste

Geothermal

2020

2018

2016

2014

2012

2010

2008

2006

SOURCE: BloombergNEF

of keeping warming below 2°C corresponds to a global Gross Domestic Product (GDP) loss in 2050 of 1.3%–2.7%. Meanwhile, McKinsey estimates that the fully-loaded unit cost of electricity production—operating and capital costs plus depreciation of new and existing assets—would actually rise about 25% from 2020 to 2040 under the net zero by 2050 scenario put forward by the Network for Greening the Financial System (NGFS), a network of 114 central banks and financial supervisors. The cost could still be about 20% higher in 2050, says McKinsey, though technological advances could blunt this impact. The delivered cost could also fall below 2020 levels over time if flexible, reliable and low-cost grids are built, the report adds. Finally, Wood Mackenzie, a research company, finds that keeping warming to 1.5°C would shave 2% off its base-case GDP forecast for 2050. But as costs come down, transition technologies will become more competitive than high-carbon alternatives, it says. “We think the turning point will be around 2035, after which global GDP growth will outpace our base case, meaning lost economic output could be recouped by the end of the century,” the report concludes. Some economies will feel the effects more than others. Hydrocarbon-exporting and carbon-intensive economies are likely to see the biggest hits to economic output, while less developed and low-income economies will bear a disproportionally high burden. Of course, economies that are already closer to net-zero targets will see a smaller economic impact from now to 2050, the report continues. And those that are better positioned—typically wealthier economies with a strong propensity to invest in new technologies—may even benefit economically by 2050, it says.

Marine

FORESIGHT

But the global cost is often overestimated, according to a new peer-reviewed study using probabilistic cost forecasts by University of Oxford researchers, published in the journal Joule. Transitioning to a decarbonised energy system by around 2050 could actually save the world at least $12 trillion, compared with a scenario in which current levels of fossil fuel use continue, says the study. A decarbonised energy sector would not only result in lower energy system costs than a fossil fuel system—by ramping up solar, wind, batteries, electric vehicles and clean fuels such as green hydrogen— but it would also provide more energy to the global economy and expand energy access to more people worldwide. 17

BUSINESS

“There is a pervasive misconception that switching to clean, green energy will be painful, costly and mean sacrifices for us all—but that’s just wrong,” says J. Doyne Farmer, a mathematics professor who led the research at the Institute for New Economic Thinking at the Oxford Martin School. “Renewable costs have been trending down for decades,” he says. “They are already cheaper than fossil fuels in many situations and our research shows they will become cheaper than fossil fuels across almost all applications in the years to come. If we accelerate the transition, they will become cheaper faster. Completely replacing fossil fuels with clean energy by 2050 will save us trillions,” Farmer adds. In models projecting a higher cost of the energy transition, researchers often underestimate how fast the cost of renewables can drop and how fast they can be deployed. He explains that there is too little systematic knowledge of technological change or the exponential growth rate of renewables technologies. There is also a problem of incumbency. “Fossil fuel and nuclear have all tried to spin this in their favour and spread lots of misinformation,” Farmer says. Elsewhere, a report by the IEA and International Monetary Fund from May 2021, found the surge in private and government spending on clean energy technologies in the net zero by 2050 scenario creates a large number of jobs and stimulates economic output in the engineering, manufacturing and construction industries. This results in annual GDP growth during the latter half of the 2020s that is nearly 0.5% higher than the levels of current climate policies, says the study.

WIND ALONE The benefits of CO2 reductions from increased wind power alone by 2050 are estimated at $386 billion, similar to Norway’s GDP, says another report by KPMG, a professional services network, commissioned by wind turbine manufacturer Siemens Gamesa Renewable Energy. Accelerating the uptake of wind energy would slash pollution, save lives and preserve vital water resources, says the report. KPMG found that wind power could increase its contribution to global electricity demand nine-fold by 2040 to 34% from 4% in 2019. Moreover, wind generation could account for 23% of the required reduction in carbon emissions by 2050: 5.6 billion tons of CO2, equivalent to the annual emissions of the 80 most polluting world cities. This reduction would have real benefits for society, with increased renewable energy use saving up to four million lives a year and reducing health-related costs by up to $3.2 trillion dollars. Air pollution is thought to be the fourth leading risk factor for early 18

death worldwide. In 2019, air pollution killed 6.75 million people, according to the Health Effects Institute and the Institute for Health Metrics and Evaluation.

JOBS GROWTH In a net zero by 2050 scenario, jobs would increase in number across the board, although obviously there will be losses in sectors such as fossil fuels, which will not be spread evenly geographically, Wood Mackenzie notes. According to the IEA, energy jobs growth outweighs declines in the fossil fuel sector in this scenario.

“Completely replacing fossil fuels with clean energy by 2050 will save us trillions”

The IEA estimates that 14 million new clean energy jobs will be created by 2030, while another 16 million workers shift to new roles related to clean energy. More energy self-sufficiency also means that more jobs will created locally, says Kingsmill Bond at the Rocky Mountain Institute (RMI), a US think tank. Eight out of ten people live in countries that import fossil fuels, he says.

GLOBAL DIVIDE A central issue, however—in terms of the availability of finance—is the disparity between the developed world and emerging or developing nations. The current energy crisis, hastened by the war in Ukraine, and Covid-19 pandemic have only exacerbated this. According to BloombergNEF’s Climatescope report, in 2020 the world’s wealthier nations accounted for 57% of asset finance for renewables, electrified transport and electrified heating—around $262 billion—up from 41% in 2017. With $195 billion, emerging markets accounted for just 43% of the total, down from 53% in 2019 and a peak of 59% in 2017. The funding gap cannot be bridged just by public institutions and private investment must be leveraged, says Kate Levick, who leads sustainable finance activities at E3G.

BANK RESISTANCE Additionally, private institutions may push back, Levick notes, citing the major Wall Street banks threatening to leave Mark Carney’s Glasgow Financial Alliance for Net Zero (GFANZ). The banks still have a FORESIGHT

BUSINESS

Road to COP27 Talks at the COP27 climate negotiations in Egypt will centre around mobilising finance and supporting developing nations in the energy transition

FORESIGHT

BUSINESS

GDP boost in Asia Compared to a baseline scenario, GDP across the Asia-Pacific region could increase if commitments made at COP26 are met

6.0

DIFFERENT FROM BASELINE

5.0 4.0 3.0 2.0

0.0

2022

2027

2032

sizeable portfolio invested in fossil fuels and are finding it hard to shift quickly, says Levick. GFANZ, set up in 2021 by Carney, is a coalition of 500 banks, asset managers and insurance companies with a reported $130 trillion in assets for tackling climate change. Bank of America, Morgan Stanley and JPMorgan are among those who say they might exit the coalition because they fear being sued over its strict climate commitments, reported the Financial Times newspaper in late September 2022. The banks are reportedly concerned about demanding strict targets on phasing out coal, oil and gas investments introduced over the summer by the UN’s Race to Zero campaign. They are also anxious about imminent US regulatory rules on disclosure of climate risk for publicly traded companies by the Securities and Exchange Commission. In 2021, lenders already successfully 20

2037

2042

2047

2052

resisted GFANZ’s demand that they immediately end financing of new fossil fuel exploration projects.

INTERNATIONAL FINANCE Nor are multilateral banks leading enough, in large part because of internal inertia and political considerations, says E3G’s Dunlop. “They are not fulfilling their role as change agents of the global financial system,” she says. Multilateral bank leaders may act as blockers to progress. David Malpass, president of the World Bank and an appointee of former US President Donald Trump, refused to say that fossil fuel emissions are causing climate change at a public meeting as recently as September 2022. NGOs were in an uproar and even Christiana Figueres, the former UN climate chief and a key player in the 2015 Paris climate agreement, tweeted: “It’s FORESIGHT

2057

SOURCE: Cambridge Econometrics

1.0

BUSINESS

simple. If you don’t understand the threat of climate change to developing countries you cannot lead the world’s top international development institution.” “The unfortunate comments by one individual should not overshadow the wider need for developed countries to adequately recapitalise Multilateral Development Banks and replenish the multilateral climate funds,” said Iskander Erzini Vernoit, a climate finance expert and former COP negotiator for Morocco.

“COP27 should serve as a wakeup call for the wealthier countries to get their act together on financing a transition to safety, in a time of multiple deepening and unequal crises”

COST OF CAPITAL The cost of capital, based on risks and perceived risks, is crucial to the global disparity of climate finance. IEA analysis suggests that the cost of capital for a utility-scale solar PV plant in 2021 in key emerging economies was between two and three times higher than in advanced economies and China. As a result, financing costs accounted for around half of the total levelised costs of a solar photovoltaics plant in these economies, notably higher than the 25% to 30% seen in advanced economies and China. New IEA estimates suggest that reducing financing costs by 2% would bring down the investment needed to reach net zero emissions in emerging and developing economies by a cumulative $16 trillion by 2050. Risks could be managed differently, suggests the IEA’s Coppel. A multilateral development bank could guarantee a project’s income in case a power purchase agreement falls through. Blended financing—a mix of public and private—could also work well, he says. Speeding up permitting (page 30) and access to land would help reduce total costs.

LOCAL SUPPORT The regional development banks should also be proactive. The African Development Bank recently proposed a plan to South Africa for $8.5 billion in climate financing—to help stop the country end its use of coal—pledged by the US, UK, Germany, France and the European Union. FORESIGHT

The bank recommends South Africa place the funds in a special purpose vehicle (SPV), President Akinwumi Adesina told Bloomberg. The SPV can then obtain a credit rating and sell zero-coupon bonds to raise more funds—perhaps as much as $41 billion, the president told the news service. To build momentum for climate finance in emerging markets, other governments and public banks must lead to help leverage private financing. “In an age of multiple overlapping crises, meeting the global financing challenge at scale requires developed country governments to do better at working together across their ministries responsible for development, climate and finance with active guidance by leaders,” says Erzini Vernoit. In September 2022, Nana Addo Dankwa Akufo-Addo, President of Ghana, called for urgent reform of the international financial system because the current monetary system is skewed against developing countries. “The financial markets have been set up and operate on rules designed for the benefit of rich and powerful nations, and, during times of crisis, the façade of international co-operation, under which they purport to operate, disappears,” Akufo-Addo said. Erzini Vernoit believes the COP27 climate talks to be held in Egypt in November 2022 should be used to help secure the necessary changes and support from developed economies. “A continuation of status quo climate finance budgets will not cut it, not during this critical decade in the history of life on Earth. COP27 should serve as a wakeup call for the wealthier countries to get their act together on financing a transition to safety, in a time of multiple deepening and unequal crises,” says Erzini Vernoit.

POLICY ENVIRONMENT RMI’s Bond believes establishing better policies in these emerging markets will help attract international fiscal support. He cites the examples of Vietnam and Morocco where helpful regulatory frameworks saw increased foreign investment—particularly in the wind energy sector. “This is a policy issue not a capital issue.” Bond also cites BloombergNEF’s Climatescope report as showing that countries which enable the right policies get the money and those with no policy framework get very little. Capital for investing in the energy transition is not in short supply, he continues, but what are lacking are good regulatory regimes. “The bottom line is that investors will invest where the growth and the opportunity lie,” he says. “That is obviously in renewables now. And that is why the cost of capital in renewables has been falling and that of fossil fuels has been rising.” • 21

FINANCE Oil and gas companies are making a ton of cash by selling fossil fuels that are destroying our future. Could the industry instead be spending lavishly to make amends? It turns out things are not so simple

isit Aramco’s website and you would not immediately guess you are looking at the world’s largest polluter. In September 2022, the site was publicising a corporate beekeeping scheme, work with the Aston Martin Formula 1 team on sustainable fuels and backing for “technologies to meet the world’s energy demands ever more reliably”. Tucked in the news section is a press release on record second quarter and half-yearly results, with quarterly income rising 22.7% to $48.4 billion. This is more than ten times the money spent on the latest phase of the 3.6-gigawatt (GW) Dogger Bank site, the world’s largest offshore wind project. The figures relating to Saudi Aramco’s environmental impact are no less staggering. According to the Climate Accountability Institute, just 20 companies are responsible for 35% of the 1.4 trillion tonnes of global man-made carbon emissions added to the atmosphere between 1965 and 2018. Aramco, official-

ly called the Saudi Arabian Oil Company, tops the list. Since 1965, when the climate impact of fossil fuels became known to industry leaders and politicians, Aramco’s activities have added some 61 billion tonnes of carbon dioxide equivalent to the air—more than 4% of global emissions. All the other companies in the Climate Accountability Institute’s most-polluting list are also oil and gas players, with Russia’s Gazprom and Chevron of the United States coming second and third. These two companies alone have added a combined 6% of emissions. In other words, three oil and gas companies have contributed 10% of total global emissions since 1965, knowing their activities could have devastating environmental and financial consequences.

CLIMATE ALARM In April 2021, a report from Swiss Re, the world’s largest reinsurer, warned climate change could wipe out FORESIGHT

Oil money Countries and companies that profit from fossil fuels could invest more in the energy transition

TEXT Jason Deign PHOTO Equinor and Johny Goerend

Convincing Big Oil to pay for the energy transition

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10% of global gross domestic product (GDP) by 2050 if net-zero emissions targets established under the 2015 Paris Agreement on climate change are not met. “Global temperature rises will negatively impact GDP in all regions by mid-century,” says the report. “In a severe scenario of a 3.2°C rise in temperatures, the global GDP loss could be as much as 14% higher than that under the Paris targets.” Climate change science is even more unequivocal. In April 2022, the United Nations Intergovernmental Panel on Climate Change (IPCC) published the final study in its Sixth Assessment Report, with a stark message. Without immediate and deep emissions reductions across all sectors, it said, limiting global warming to 1.5°C is beyond reach. Meanwhile, the effects of climate change are becoming more visible. An August 2022 analysis of 504 extreme weather events and trends by climate science and policy information service Carbon Brief showed that 71% were made more likely or more severe by human-caused global warming. Given the scale of these impacts, it is 24

reasonable to question what the oil and gas industry is doing, or aiming to do, to avoid them. There is no question that the sector’s historical impact has been for good. Fossil fuels have powered humanity’s development since the Industrial Revolution, allowing society to record levels of affluence and well-being. Today, fossil fuels meet 77% of the world’s need for primary energy. Nevertheless, it is hard to escape the sense that the oil and gas sector has been profiting from this need while shirking any responsibility to address its negative impact on the environment. Aramco is not only the most polluting company on the planet but also one of the richest. It came third in the Forbes Global 2000 list of largest companies in the world, published in May 2022, with ExxonMobil and Shell also making the top 20. The oil and gas sector’s historical attempts to discredit the science behind climate change have been widely publicised, and the industry cannot say it does not have the tools to deal with emissions. FORESIGHT

Cash pipeline Oil and gas companies are more focussed on delivering the energy requirements of today than decarbonising the future energy system

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Not walking the walk

SOURCE: ©Influencemap

Percentage of green claims in 2021 public communications vs. percentage of low carbon investments in 2022 Capex

Claims

Investments

TOTAL: 3,421

TOTAL: $87-96bn

GREEN CLAIMS

LOW CARBON

OTHER

Data covers the claims and investments of BP, Shell, Chevron, ExxonMobil and TotalEnergies

TOOLS AVAILABLE Carbon-capture technology in one form or another has been available to the sector since the 1920s and it started storing the carbon underground in the 1970s, but mainly to enhance oil recovery rates. Apologists could argue that modern carbon capture and storage (CCS) facilities should be installed by the industrial customers that use fossil fuels, rather than the oil and gas companies themselves. Yet it remains an uncomfortable fact that most of the CCS plants in operation today are still used for enhanced oil recovery. The main tool that the oil and gas sector could use to combat climate change is instead being used to make it worse. Furthermore, evidence suggests most oil and gas companies are still committed to worsening the effects of climate change in pursuit of profit, despite public pledges to the contrary. In September 2022, the climate think tank InfluenceMap analysed company disclosures from BP, Chevron, ExxonMobil, Shell and TotalEnergies. It found that 60% of the companies’ public messages FORESIGHT

made green claims, compared to 23% promoting oil and gas. Yet the companies were only found to be spending an average of 12% of capital expenditure on low-carbon investments in 2022. The biggest divergence between claims and reality was at Shell, which boasted of sustainability in 70% of its communications while only putting 10% of its capital towards low-carbon investments. While these data sets are not mutually exclusive, they indicate these companies are paying mere lip service to the challenge of climate change. “The world’s big oil and gas companies are spending huge amounts of time and money talking up their green credentials, while their business investments and lobbying activities tell a very different story,” InfluenceMap’s Faye Holder says. “These companies talk about cutting emissions and transitioning the energy mix, but at the same time continue to invest heavily in new fossil fuels,” she adds. “These companies are out of step with science-based pathways to net zero.” 25

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UNCERTAIN GOALS Furthermore, 41% of Fortune Global 500 companies in the oil and gas sector have yet to commit to net-zero emissions targets, and only 5% have set 2030 goals, according to Climate Impact Partners, a carbon offset provider. Of those that have targets 63% have made pledges that only cover so-called scope one and scope two emissions, which are those produced directly by company operations and energy use. However, scopes one and two only cover around 11% of the sector’s emissions, Climate Impact Partners data shows. Most oil and gas emissions fall under scope three, which relates to how a company’s products are sourced and used. Despite a worsening climate and ever-more dire warnings from bodies such as the IPCC, the oil and gas sector’s stance on emissions reduction has if anything become more ambiguous in recent months. The invasion of Ukraine in February 2022 sparked a rush for oil and gas to replace Russian supplies. Oil and gas companies such as Aramco have profited handsomely from this bull market. At the same time, new drilling plans are being tabled as lawmakers temper the need to reduce emissions with a desire to shore up energy security through fossil fuels. Experts have warned that new projects could be unwise not only from an environmental but also 26

from an energy security point of view. When the UK government announced a new oil and gas licencing round in September 2022, for instance, Alyson Harding of analyst firm Westwood Global Energy Group said: “This will not be a short-term fix for UK energy security.” “For licences awarded since 2002, the average time taken from award of the licence to first production is seven years and requires the drilling of many exploration and appraisal wells to confirm commerciality of discoveries,” she added.

UPPING PRODUCTION In the US, meanwhile, a community action group called the Louisiana Bucket Brigade has sounded the alarm over proposals to increase gas export terminal capacity on the Gulf Coast. “Each proposed terminal, if constructed, would liquefy and export billions of cubic feet of gas per day for sale on the global market,” says the group in a briefing note. “Gas, a fossil fuel extracted by drilling, is non-renewable, and the US’s reserves are finite,” it adds. “The gas industry is looking to drive even higher profit margins by selling greater volumes of gas on the lucrative European and Asian markets.” In what could be a further sign of the oil and gas sector’s current priorities, Shell in September 2022 FORESIGHT

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announced it was pulling out of two offshore wind projects in Ireland. “This is a portfolio decision for Shell, for whom offshore wind remains a key growth area and integral to the delivery of their Powering Progress strategy,” insisted Shell’s erstwhile partner, Simply Blue, in a press statement.

LOWERING EMISSIONS The oil and gas sector has immense potential to curtail its global emissions even without abandoning oil and gas production. The industry could significantly reduce emissions this decade by trapping methane—a gas responsible for around 30% of the rise in global temperatures since the Industrial Revolution, the International Energy Agency (IEA) says. Yet methane is routinely vented or flared when extracted alongside natural gas.

“To come up with a consistent way of finding out exactly who is spending what and where is quite difficult”

The energy sector accounts for roughly 40% of manmade methane and the industry’s emissions grew by 5% in 2021, says the IEA. However, “None of the oil majors have lobbied to strengthen the stringency of methane emissions reduction regulations since 2021, despite the importance of methane mitigation being a key claim from the industry,” says InfluenceMap.

CASH RICH More importantly, the oil and gas sector is one of the few with the money and the expertise to deliver the energy transition on time. In the first six months of 2022, the industry’s top 25 players earned $341 billion, according to a report from Westwood. This is enough to cover almost a quarter of the $1.4 trillion being spent on clean energies in 2022, based on figures from the IEA. Getting oil companies to channel more of their cash into the energy transition is not a straightforward affair, though, for various reasons. One is that it is quite hard to work out how much they are spending already. “The transparency and consistency in reporting on new energies is not the same as for the core hydrocarbon business,” says David Linden of Westwood. “To come up with a consistent way of finding out exactly who is spending what and where is quite difficult.” FORESIGHT

Another issue is the amount of money the companies may have to spend might not be as much as it seems. In 2020, the coronavirus pandemic hit the sector with force, with a Haynes Boone analysis of North American oil and gas producers showing that debt levels and bankruptcies soared. Linden says a chunk of recent revenues in the US have gone towards paying off these debts. However, more broadly in the industry revenues have been used less on paying off debts than on rewarding shareholders for their loyalty. Beyond this, he says, many oil and gas companies seem to be stepping up their commitment to the energy transition—but some complain of a lack of adequate opportunities. “People are saying we will continue to spend, with some majors now committing more capital than before—but the step up is not consistent with the rise in recent earnings,” says Linden. “Part of the argument for this misalignment is that large-scale projects, that you really want to see big dollars being spent on, just aren’t there.”

INCREMENTAL PATHWAYS Oil and gas investment committees may be naturally drawn towards exploration and production projects because some of these opportunities can be completed more quickly and with more attractive returns than the current set of renewable energy hydrogen or CCS projects, he says. Perhaps because of this, “Every single net-zero strategy of the international oil majors, except BP, envisions incremental change until you get to 2025, 2030 maybe, when there’s more drastic change,” says Linden. “Hydrocarbon production will grow in the next few years for the majority of companies, if not all.” The narrative being followed by the industry is that it needs to continue satisfying global fossil fuel demand until alternatives have become viable in terms of scale, which oil and gas companies believe will happen in the 2030s. What this means in practice is, “We’re essentially now committing to an overshoot scenario,” says Linden. One final point is that the current response to the climate crisis varies quite widely across players in the oil and gas industry. The term “oil and gas” encompasses a wide range of businesses and business models, from publicly traded supermajors such as ExxonMobil and Shell to national oil companies such as Aramco, which dominate the market in terms of production. Within this diverse ecosystem is an even more diverse set of corporate strategies. National oil companies are focused on increasing a nation’s wealth and with state administration lifespans usually measured in years rather than decades there tends to be scant focus on long-term sustainability. 27

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US supermajors, meanwhile, enjoy a relatively benign regulatory environment thanks to decades of investment in lobbying. This means they too seem relatively untroubled about deviating from business as usual. In Europe, however, growing regulatory and consumer pressure is forcing oil and gas companies to take sustainability more seriously.

LOSING OUT They also risk losing their grip on energy markets as European utilities race ahead with transition plans, attracting investors in the process. The Italian power company Enel provides a glimpse of what Europe’s oil and gas players could be missing out on. In 2021, the company brought its net-zero emissions pledge forward by a decade, from 2050 to 2040. “Enel’s actions and commitments are increasingly attracting the attention of socially responsible investors, whose stake in the company is steadily growing,” says an Enel spokesperson. These investors represented 14.6% of the group’s share capital in 2021, more than double 2014 levels, “Enabling the group to further diversify its investor base,” the spokesperson says. Such considerations have encouraged European oil and gas companies to take the lead in the industry’s move towards net-zero emissions. European players took the first seven places in a January 2022 analysis of the top renewable energy performers in the oil and gas sector, carried out by research body GlobalData. Among these was Norway’s state-owned multinational Equinor, which has a uniquely pro-transition stance thanks to Norway’s generally progressive view of environmental affairs.

“Equinor’s strategy is backed up by clear actions to accelerate our transition while growing cash flow and returns”

CARBON EFFICIENT “Equinor is committed to long-term value creation in support of the goals of the Paris Agreement,” says Equinor’s Sissel Rinde. “Our strategy consists of three pillars and combines focused, carbon-efficient oil and gas production with accelerated, value-driven expansion in renewables and leadership in building out new low carbon technologies and value chains.” The company is living up to its commitments with important investments in offshore wind, a stake in solar developer Scatec and significant CCS and hydrogen projects. The carbon emissions from extraction activities at its Johan Sverdrup oil field are also 95% lower than the world average, mostly because the energy for production comes from shore-based electricity rather than gas turbines on rigs. The company’s Snorre and Gullfaks fields, meanwhile, will be the first in the world to be powered in part using a floating offshore wind farm. 28

“Equinor’s strategy is backed up by clear actions to accelerate our transition while growing cash flow and returns,” Rinde says. “We are optimising our oil and gas portfolio to deliver even stronger cash flow and returns with reduced emissions from production and we expect significant profitable growth within renewables and low carbon solutions,” she adds. Such comments reflect a common sentiment within oil and gas: producing carbon-free energy would be nice, but right now stakeholders are demanding results that can only be achieved with fossil fuels. Since those stakeholders are the people who invest in oil and gas companies, buy oil and gas products and elect oil and gas-friendly administrations, it may be that the key to getting companies to change is lies not with the oil and gas sector, but with society as a whole. • FORESIGHT

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POLICY Clean energy technology is becoming more efficient and powerful, while more money than ever is seemingly flowing into renewables. But administrative barriers thrown up by red tape and permitting bottlenecks threaten to put a damper on the energy transition

nterest in clean energy is higher than ever before, as climate targets begin to bite and cheaper renewables offer an unavoidable alternative to more expensive fossil fuels. New policy announcements to adopt more renewables drop seemingly on a daily basis. Countries around the Baltic Sea agreed in August 2022 to increase their combined offshore wind capacity sevenfold, Spain aims to more than quadruple its solar power reserves by 2030 and the US government plans to spend big on floating wind farms. Renewables technology is advancing at a rate of knots too. Vestas, a Danish manufacturer, recently started testing a monster 15 megawatt (MW) offshore wind turbine, while tidal facilities and floating turbine platforms are also scaling up quickly. Another barrier to the mass rollout of clean technology, financing, is also gradually being taken down, through a mixture of changing investor appetites and progressive policymaking by regulators around the world. The European Union, for instance, has rolled out its sustainable investment rulebook to help guide money towards climate-friendly projects, while the European Investment Bank (EIB) as part of its re-

brand as a “climate bank” refuses to fund gas power. Across the Atlantic, meanwhile, US President Joe Biden’s administration successfully pushed the Inflation Reduction Act through, unlocking nearly $400 billion in cash for energy security and climate change resilience initiatives. According to BloombergNEF, an energy finance research group, more and more money is flowing into decarbonisation measures like electric transport, storage and neutralising the emissions from industry across the globe.

SLOW PROGRESS But for the renewables sector, although investments have doubled over the course of a decade from $200 billion per year to $400 billion, the figure has levelled off and not grown at the rate needed to bring greenhouse gas emissions down to where they need to be by 2050. Admittedly, $100 of renewable energy buys you much more in 2022 than in 2012, due to the plummeting price of solar and wind electrons. However, net-zero targets and the 2015 Paris Agreement’s temperature benchmarks require a much faster energy transition than the one we are currently getting. FORESIGHT

Administrative burden The amount of paper work required to permit a wind power project is holding the sector back

TEXT Sam Morgan ILLUSTRATION Luke Best PHOTO Sterling Lanier

Red to green: Where to cut the tape

FORESIGHT

POLICY

Ember, an energy think tank, insists that the EU needs to double the pace of its wind and solar rollout in order for the Paris deal’s limit of 1.5C of global warming above 1990 levels not to be breached. New data shows that additional renewable capacity needs to top 72 gigawatts (GW) every year by 2026 in order to keep the 1.5C target alive. Current trends suggest that EU countries will not even breach 40 GW a year. “Europe no longer lacks renewables ambition, but it is now facing an implementation gap. Higher targets have not yet translated into accelerated deployment on the ground,” warns Ember data analyst Harriet Fox. Croatia, Finland, Lithuania and Sweden are set to hit their benchmarks but the rest of the 27-strong union could struggle to install enough clean power generation. A significant reason for that is red tape in permitting processes.

PERMIT HEADACHES Renewable facilities like wind farms and solar arrays need to run the gauntlet of permitting and approval procedures before they can be built. Environmental impact assessments need to be made and local people need to be consulted beforehand. EU legislation says that new projects should be permitted within two years and that repowering projects—replacing existing wind turbines or solar panels with newer, more powerful models—should take just one year. But this is not the reality, not by a long shot. According to Zoe Grainge, a senior analyst at S&P Global Commodity Insights, “Permitting is one of the single largest obstacles to renewable power build-out in Europe, including the UK.” Data provided by Ember and trade body WindEurope shows that none of the 18 major EU countries sampled come in under the 24-month mark for onshore wind projects. Just three markets achieve it for solar power. This translates into completion statistics that make hard reading: in Germany, the average time taken to finish a wind project is six years. In Italy and France it takes even longer, meanwhile in China it is closer to two years. In some cases, the permitting process takes up to five times longer than the law allows. Industry players explain that a combination of digitalisation issues, byzantine local authority procedures and legal appeals are hamstringing green efforts in a big way. Spain has more than 20 GW of wind power capacity stuck in the permitting process and just 9 GW actively under construction. Poland, which wants to ditch Russian energy imports quickly, has 12 GW wrapped in red tape and just 3 GW under construction. Nearly the same amount of solar power capacity 32

is also mired in the Polish administrative quagmire, waiting for the right permit that will allow the plants to be connected to the national grid. The government has been urged to reform the process sooner rather than later.

GLOBAL ISSUE Permitting is by no means a niche issue either, as United Nations secretary-general Antonio Guterres said in September 2022, “We urgently need to put policies in place to incentivise investments and eliminate bottlenecks caused by red tape, permits and grid connections.” It is also a matter of geopolitics and national security. In its ten-point plan on how the EU can reduce Russian gas imports, the International Energy Agency (IEA) insists that admin hurdles must be torn down. It says that 20 terrawatt-hours (TWh) of extra renewable energy could be added in the next 12 months and most of this would be utility-scale wind and solar PV projects which could be brought forward by tackling permitting delays. “This includes clarifying and simplifying responsibilities among various permitting bodies, building up administrative capacity, setting clear deadlines for the permitting process and digitalising applications,” the report adds.

“Permitting is one of the single largest obstacles to renewable power build-out in Europe”

RED TAPE Vladimir Putin’s invasion of Ukraine and Europe’s subsequent quest to nix Russian fossil fuel imports has turbocharged energy policymaking, re-energising legislative efforts that had already been kicked off under the EU’s flagship Green Deal policy, first presented in December 2019. The European Commission published a new strategy known as the REPowerEU plan in May 2022 in a bid to marshall the policies of the 27 member states and propose new measures to save energy and replace imports with clean alternatives. As part of that plan, solar power installations should double by 2025, power purchase agreements (PPAs) should be streamlined and overall renewable energy should hit a 45% share by 2030. Permitting must also be improved across the board. “The duFORESIGHT

POLICY

Fact not a fairytale It took 36,000 pages to permit three turbines in Germany

Other measures under consideration include “silence means agreement” or “positive administrative silence” rules, which would mean projects are automatically approved if the relevant authorities do not respond in time.

SOURCE: Enel Group

GO-TO ZONES

MOBY DICK

LORD OF THE RINGS

THE HARRY POTTER SERIES

36,000 SHEETS OF PAPER

ration and complexity of the permit-granting procedures greatly varies between the different renewable energy technologies and between member states,” the Commission says in the REPowerEU plan. “Our aim is to simplify and prioritise. With our new proposal, renewable energy projects are considered as being in the overriding public interest,” EU energy commissioner Kadri Simson explained in June 2022. Renewable energy’s new label as a matter of “overriding public interest and in the interest of public safety”, will mean that its design, permitting, construction and operation should be given priority attention by regulators. “This is important because many wind turbine projects are subject to litigation and appeals. The notion of overriding public interest will make it easier for judges to rule in favour of wind energy when weighing its expansion against other different public interests,” explains Christoph Zipf at industry trade body WindEurope. The Commission also urges countries to implement permitting rules already set by the Renewable Energy Directive (REDII), which stipulates that approvals should be granted within two years and that a single authority should be charged with processing them. FORESIGHT

The main way that Brussels legislators are attempting to help the renewables sector navigate the permitting maze is to push national governments to be more strategic in their planning and designate so-called “go-to zones” in which to deploy clean energy. Renewable zones would still be subject to environmental impact assessments but the projects carried out within the area would benefit from a presumption of not having significant effects on the environment. Most significantly, permitting authorities would be obligated to grant approvals within just one year in go-to zones. If eventually backed by member states, the plan could be a powerful stimulus for the sector. The Commission says governments could either submit one plan per go-to zone or per technology type, which would incorporate more than one zone, granting authorities a bit more flexibility in how they assess potential sites. Degraded land that is not suitable for agricultural use—a nod to the ongoing fears over food supply triggered by the Ukraine invasion— industrial areas like ports and transport corridors have already been touted as easy-to-identify zones. Lotta Pirttimaa at trade group Ocean Energy Europe, says identifying go-to zones for ocean energy should not be too challenging. “There are many studies on the resource potential and best areas for wave and tidal energy production,” says Pirttimaa. Bodies such as the European Marine Observation and Data Network (EMODnet) are key to that effort as a network of organisations that aims to collect and distribute in-depth marine data freely. Germany recently uploaded its spatial planning to EMODnet’s portal, increasing the amount of data available to users.

SITE SENSITIVITY However, NGOs are less keen on some of the implications of go-to zones. A WWF Europe report insists that the idea, “Could be helpful, provided that these areas are based on wildlife sensitivity mapping and reliable spatial planning”, but adds that biomass and hydropower should be excluded. The report adds that renewable projects should not be exempted from the usual impact assessments as proposed, because that would call into question the ability of authorities to monitor and evaluate infrastructure performance over time and its impact on biodiversity. 33

POLICY

California dreamin' California’s DRECP is a notable example of a regulator pinpointing areas that have a high potential for clean energy generation

FORESIGHT

POLICY

“The solution is better spatial planning, increased administrative capacity in competent authorities and effective public and stakeholder engagement—not exemptions from important environmental legislation,” says WWF’s Alex Mason. This issue may flare up further, as EU energy ministers agreed that for repowering projects only environmental impacts that are additional to existing installations should be subject to further assessment. According to Rystad, an energy analysis company, repowering of utility-scale solar power capacity will ramp up in the late 2030s and completely take over new capacity additions by the mid-2040s, illustrating how crucial the issue is set to become in the next stage of the energy transition.

“We have the investment. There are clear plans in place to reinforce the grid. But we cannot build them if we cannot get them through the planning system”

Go-to zones are not a completely new concept in energy policymaking. California’s Desert Renewable Energy and Conservation Plan (DRECP), approved in 2016, is a notable example of a regulator pinpointing areas that have a high potential for clean energy generation. However, Alex Breckel, an infrastructure expert with the Clean Air Task Force, an energy think tank, points out that the DRECP soured the US on go-to zones, because it in effect created “no-go zones” for renewables and that permitting is actually made more complex outside of priority areas. French utility firm EDF is also sceptical about the EU’s plan, warning that “in the absence of sufficient human resources we fear that public officials would prioritise the files related to the go-to-areas, thus creating a two-tier system.”

POINT OF CONTACT According to various surveys and consultations held on how to improve permitting, one of the main causes of delays and administrative headaches is the lack of a single contact point for prospective renewable energy developers. Even though EU legislation already obligates governments to designate one authority, platform or entity to handle permitting, in practice these are few and far between. FORESIGHT

An EU official, speaking on condition of anonymity, acknowledges that member states are in breach of REDII but that there is unlikely to be legal action while the laws are being updated. Internal dialogue is also always the preferred solution. Governments are also reportedly making progress on permitting under the auspices of the new Single Market Enforcement Taskforce, a forum set up in 2020 where EU and national officials can discuss matters that affect the functioning of the single market. However, Josefin Berg, an analysis manager at S&P Global Commodity Insights, says that measures like this, “Will take a while to trickle down to local decision makers.” Aida Garcia, with sector association Eurelectric, insists that MEPs and governments should make further changes to the Commission’s permitting proposal during upcoming negotiations on the updated renewable energy directive (REDIII). “Given the emergency need to deploy renewables, there should be a conditionality for member states to transpose the new permitting rules. Only 18 [out of 27] countries have so far transposed the directive,” Garcia explains. She suggests that ongoing payouts of loans and grants from the EU’s €800 billion pandemic recovery fund could be withheld if countries do not fulfil their obligations. DIGITAL FOCUS WindEurope insists that one-stop shops should also go hand-in-hand with digitalisation policies, as this would help permitting authorities to speed up applications and address understaffing issues. Germany, unsurprisingly perhaps for a country whose public authorities still insist on using the fax machine, is one of the main offenders in insisting developers submit requests on paper. In one instance, a developer in Baden-Württemberg had to print out 36,000 sheets of paper just to file an application for three wind turbines. The printing and delivery costs topped €10,000, illustrating how lack of digitalisation is kryptonite for potential investors. There are examples of good practice though. Ocean Energy Europe’s Pirttimaa points out that “Scotland has a very developed permitting process for ocean energy, with a one-stop-shop, Marine Scotland, and detailed guidelines available on their website.” This has helped Scotland roll out impressive wind projects on and offshore, and become a leader in trialling tidal and wave technology. Developers recently connected the 1075 MW Seagreen offshore wind site to the grid, which is reportedly the deepest fixed-bottom turbine installation in the world. 35

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Stuck in the bureaucracy Top 20 EU countries by wind pipeline capacity (GW)

Permitting

Members of the European Parliament want to enshrine digitalisation further in the updated renewables directive, voting in September 2022 for updates that would obligate governments to ensure all applicants can submit their documents in digital form. “If an applicant makes use of the digital application option, the entire permitting process including the administrative internal processes needs to be carried out digitally,” the final agreement states. Public hearings would also fall under this obligation.

PERMITTING IN PRACTICE In the Netherlands, the government announced a target to install 70 GW of offshore wind capacity, as part of a commitment with other North Sea countries to hit 260 GW by mid-century. As part of the Dutch’s plans to electrify vast swathes of the country’s economy and produce green hydrogen in situ for domestic and export purposes, permitting reforms are also incoming. 36

Under construction

One major allowance will be permission for offshore facilities to connect to the main grid via a single “hub point”. The government says this will both cut down on infrastructure costs and permitting times, as authorisations will not be needed. The Netherlands won approval in September 2022 from the European Commission for its application for nearly €5 billion in financing from the EU’s €800 billion-strong pandemic recovery fund. The application commits to further reforms of the Dutch permitting process.

OFFSHORE FOCUS On the other side of the Jutland peninsula, eight countries around the Baltic Sea pledged to turbocharge their offshore wind buildout, setting a joint target of 19.6 GW by 2030, seven times the current capacity. “We will pursue faster permitting processes and strive for a balanced coexistence of economic and ecological needs,” states the declaration, signed FORESIGHT

SOURCE: Eurelectric

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by the prime ministers and presidents of Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Poland and Sweden. In a separate document signed by energy ministers, the “Baltic 8” agreed to accelerate permitting processes for new renewable energy generators and the grid infrastructure at a national and EU-level including reinforcements necessary for balancing variable renewables and removing internal bottlenecks.

“We urgently need to put policies in place to incentivise investments and eliminate bottlenecks caused by red tape”

publish new reform legislation before the end of 2022. There are also plans to set up a one-stop shop for applications and a new court tasked with overseeing environmental and planning issues.

SPAIN SUCCESS Spain, meanwhile, is working towards its target of 74% renewable power and 42% total renewable energy by 2030 by streamlining procedures. In a Royal Decree published in March 2022, new provisions for permits and grid access were written into law. The new system offers fast-track permitting for clean energy projects that exceed 50 MW but come in under 75 MW for wind and 150 MW for solar. They must still demonstrate that they do not pose a threat of unacceptable impact on the local environment and cannot be marine-based. New projects can also apply for a suspension of grid access permits during a grace period, which is aimed specifically at solar power installations.

ACROSS THE POND France is also betting big on renewables finally, opening its first large-scale offshore wind farm in September 2022. However, utility firm EDF warns that “administrative procedures are too long, mainly because of not enough public agents to process permit applications efficiently and on time.” The company adds that “the balance between biodiversity protection and climate change mitigation needs to be improved.”

IRISH MOMENTUM In Ireland, permitting is also an issue and is one of the main hurdles preventing the gusty island from achieving the government’s informal objective of becoming “the Saudi Arabia of wind energy”. “The statutory objective is for an [onshore] wind farm application or appeal to be decided in 18 weeks. However, the average time for a decision is actually 60 weeks,” says Justin Moran from Wind Energy Ireland, an industry body. Ireland’s offshore sector is only in its infancy, despite massive potential, and waiting times for a licence needed to map the foreshore are stretching beyond 18 months. In the United Kingdom, meanwhile, the turnaround time is between 12 and 15 weeks. “We have the pipeline of projects to deliver our targets. We have the investment. There are clear plans in place to reinforce the grid. But we cannot build them if we cannot get them through the planning system,” Moran adds. Change is coming. Recruiting new staff is a challenge but more resources are being funnelled toward permitting divisions and the government is due to FORESIGHT

The Biden administration’s success in passing the Inflation Reduction Act, a pared-down and retooled version of the more comprehensive Build Back Better initiative, has also prompted a rethink of how permitting is handled. This is not just because the White House wants to deploy 30 GW of offshore wind capacity by 2030 and invest hundreds of millions of dollars in updating the country’s outdated electricity grids. There is a more pressing political need to address permitting. In return for eventually backing the IRA, West Virginia Senator Joe Manchin—who had manoeuvred himself into a kingmaking position—won a major concession from the White House to support his push to reform energy project authorisation procedures. Under Manchin’s proposed bill, designating projects as in the national interest—similar to what the EU would like to achieve—would be streamlined. It would also set maximum permitting deadlines and establish a single inter-agency review process. However, Manchin’s reform push faces an uncertain future, as enough Democrats and Republicans banded together in September 2022 to block the bill. The former opposed perks for fossil fuel developers—a gas pipeline in Manchin’s home state would benefit greatly—while the latter essentially wanted to punish the senator for helping pass the IRA into law in the first place. Paradoxically, permitting reform has been a priority for Republicans for a number of years. Manchin’s next chance to win support for the bill will likely come after November’s midterm elections or in December, as part of a government spending bill. • 37

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Will the UK’s permitting reforms speed up offshore wind deployment?

for environmental impacts, designed to avoid such lengthy hold ups. Under the current system, compensatory measures are often decided during the application process of an individual project, and disagreements cause delays. Strategic compensation would mean that any requirements to mitigate the environmental impacts of the project are decided upfront. They would also consider a wider scale than the individual development, resulting in better results. Strategic compensation already exists under the EU Habitats Directive—Ørsted gained permission for the 2852 MW Hornsea 3 development in exchange for building nesting towers for kittiwakes. Walker believes that strategic compensation will cut permitting delays. “At the moment, each project is having to find sites and scrambling around during the decision stage—that’s delaying projects quite significantly,” he says. Conservation charity the RSPB has long wanted a more strategic system. “It is not in the ability of individual developers to safeguard our seabirds. We need a strategy—one that recognises the cumulative impacts of each project. All intervention must focus on tackling the root causes of wildlife decline rather than tending to the symptoms with short-term solutions,” it states. It has published a report—with input from trade body RenewableUK—on how accelerating offshore wind can be nature positive. It recognises the need for a new approach in order to reach the new offFORESIGHT

Bird protection Delays to offshore wind projects to-date have often centred on their impacts to habitats and migration routes

TEXT Catherine Early PHOTO Eder Pozo Pérez

nergy security concerns prompted by the war in Ukraine have led to Europe-wide calls to boost speed up permitting for renewable energy so that installed capacity can be boosted as quickly as possible. The UK spelled out its plans in its Energy Security Strategy published earlier this year. The then-prime minister Boris Johnson promised to make the UK the “Saudi Arabia of offshore wind”. The plan sets out how the government intends to use “smarter planning” to both accelerate the pace of deployment by 25% and maintain high environmental standards, leading to up to 50 gigawatts (GW) of new installed capacity by 2030 from around 14 GW today. Currently, an issue that has caused opposition and delay to UK offshore wind proposals is their impacts on wildlife habitats, in particular seabirds. Delays to offshore wind projects in the UK permitting process have all occurred in the final stage of the process, when the government minister that overseas permitting is due to make a final decision, says Angus Walker, from law firm BDB Pitmans. At that point, the resulting overrun has varied from 60 to 800 days, and has tended to be caused by insufficient assessment of the impacts on internationally protected habitats and a lack of certainty on the effectiveness of compensation measures for bird strike deaths, such as enhancing or building breeding areas, Walker says. One of the reforms in the energy security strategy is the introduction of “strategic compensation”

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shore wind targets, which it says will require “startling speed”—the equivalent of one 12 MW wind turbine installed every weekday for the rest of the decade. “We cannot continue to operate in silos and we cannot address the challenges of offshore wind expansion project by project,” it states. In addition, the government has proposed reviewing the way the Habitats Regulations Assessments are carried out for all projects making applications from late 2023, which it says will maintain wildlife protections while reducing paperwork.

BIODIVERSITY POSITIVE It is also bringing in an “offshore wind environmental improvement package”, which will include an industry-funded marine recovery fund and design standards. Contributions to the fund will come from developers, through another new policy known as “marine net gain”. This would mirror the UK’s system of biodiversity net gain, which mandates that all developments over a certain size have to improve habitats by ten per cent. However, due to the increased complexities of implementing such a system in the marine environment, the government plans to start with the relatively simple introduction of a levy on marine development. Under this, developers would contribute to its marine recovery fund, with these contributions paying for environmental enhancement or restoration. The government will then continue to draw up a more sophisticated system as technical knowledge improves. Developers are concerned that the “nature first” approach the government has proposed means that the benefits of low carbon power generation will not be considered as a positive impact when assessing the impact of the project, says Juliette Webb from RenewableUK. In addition, the level of contributions will be set according to the capital expenditure of the project, meaning that offshore wind will pay the most, when the impacts of other industries are higher, she adds.

CABLE TIES Grid connections from offshore wind sites to land have also become controversial and delayed consent. For instance, Swedish developer Vattenfall submitted its application for the 1.8 GW Norfolk Vanguard wind farm in June 2018 and it was originally granted permission in July 2020. However, following concerns about the impacts of the terrestrial substation connecting it to the mainland grid, combined with that for the neighbouring 1.8 GW Norfolk Boreas wind farm, the permission was quashed by the UK High Court in February 2021. It 40

was then re-granted by the secretary of state in February 2022—a full year lost to bureaucracy. To reduce the need for such infrastructure, and therefore the risk of similar delays, the government intends to allow clusters of offshore wind farms to connect to an interconnector rather than the pointto-point connections currently in use—similar to the German connection system. The move is also predicted to save consumers £6 billion by 2050.

TIME SAVER Another proposal in the energy security strategy is to fast-track the consenting process for “priority cases where quality standards are met”, so that the time taken for the public examination of the proposal is cut from six months to four. Whether this will help project timescales will depend on the details, according to Walker.

“We cannot continue to operate in silos and we cannot address the challenges of offshore wind expansion project by project”

“It’s all very well saving two months on the examination process, but if it takes you more than two months to achieve the higher quality standard, then it won’t really save time,” Walker says. Though good quality design early on in the process might well save time later in the project, he adds. What really spooks the investment market is uncertainty, Walker says. “The uncertainty is both about what the new policies are and whether the ones that they announced only two or three months ago will continue.” Webb does not believe that concerns around how long permitting takes were hampering investment in offshore wind, pointing to the size of the interest from developers and investment in the most recent auction rounds in both Scotland and England as evidence. “There are obviously concerns around the time it takes for things to happen, but we look at it more from a resourcing perspective. The process is not very streamlined and drains a lot of resource in a way that’s probably quite unnecessary, so it could be better,” she says. “For developers and investors the main prize is renewable energy, and they are continuing to invest significant amounts of money,” Webb adds. • FORESIGHT

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TECHNOLOGY Companies that are keen to purchase clean energy on an hour-by-hour basis to match their usage are encountering issues that will have to be overcome by the wider electricity system as it moves to fully decarbonised supplies

All day, every day

As companies have woken up to the importance of boasting green credentials, demand for clean energy procurement has soared. Businesses looking to reduce their carbon emissions usually start by looking at their energy supplies. Perhaps the most obvious way to secure a completely renewable energy supply is to install on-site generation and storage assets such as rooftop solar panels and batteries for self-consumption. This may be an option for some smaller commercial and industrial firms, but not for large corporations with high energy demands and geographically dispersed real estate assets. Instead, these companies have traditionally resorted to carbon accounting, purchasing enough clean power to make up from the dirty power they buy from the grid. To do this, the businesses originally relied on energy attribution certificates or EACs.

CERTIFIED GREEN An EAC certifies that a given unit of energy has been produced renewably. Since 2009, the European Union has backed a form of EAC called a Guarantee of Origin. A company using, say, 50 megawatt-hours of electricity a year could buy Guarantees of Origin for FORESIGHT

Around the clock Corporates are trying to source power to match their demand to the minute

TEXT Jason Deign ILLUSTRATION Luke Best PHOTO Chuttersnap

osefin Berg of S&P Global Commodity Insights remembers hearing about 24/7 power matching at a solar conference early in 2022. Unusually for a trade event, there was a heated debate on the subject around, “Whether that is something you should aim for or not aim for, how difficult it is and what are you signing for?” she says. The issue of 24/7 clean power matching is giving rise to a lot of questions, even though it is a subject few people have even heard of. Some of these questions could be central to the global energy transition. In a nutshell, 24/7 clean power matching means making sure that the zero-emission energy used by a corporate power-purchase agreement (PPA) customer is exactly matched, hour by hour, with the generation provided by a supplier. Clearly, this kind of power matching happens as a matter of course on the wider grid. Grid operators must make sure generation matches demand not only on an hourly basis but every minute of every day. However, the grid operators can do this by calling upon a range of dispatchable assets, including the coal plants and gas peakers responsible for the bulk of the electricity system’s emissions. It is to avoid these resulting emissions that PPAs exist in the first place.

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that amount and effectively claim to have sourced all its electrical energy from low-carbon sources. “Guarantees of Origin or EACs, as the generic equivalent globally, are extremely powerful tools for monitoring and reporting on renewable energy,” says Bruce Douglas of Eurelectric, a European electric utility association. Around a decade ago, large corporations began to realise they could go one better by procuring renewable energy directly from a project developer. This allowed the offtaker not only to claim their annual energy consumption was being met with an equivalent amount of low-carbon electricity procurement, but also to negotiate a fixed price for the supply over several years. Thus, the corporate PPA was born. The amount of renewable energy capacity given over to such PPAs has soared in recent years, particularly in Europe. Businesses there have gone from procuring barely 100 megawatts of PPA-based power in 2013 to 18.5 gigawatts (GW) in 2021, according to figures from REsource, a European platform for corporate renewable energy sourcing. Ultimately, these PPAs are still essentially an accounting tool, with the amount of grid supplies consumed and clean electricity procured balanced out at the end of a year. Whether a company procures via EACs or a PPA, there is no real link between the clean energy it buys, which could come from anywhere in the world, and the electricity it uses, which is sourced from the local grid.

issues. There were areas where we were running significantly on coal, even though we were claiming we were 100% renewable,” she said. As these impacts started coming to light, Google’s executives asked themselves: “Why aren’t we decarbonising the grid even though we’re buying up all this wind and solar? The reality is, when the wind doesn’t blow and when the sun doesn’t shine, we’re still running on something. We ended continuing to run on gas [and] coal,” Golin explained.

NOT 100% This mismatch means that even if a company is buying the equivalent of all its energy through a renewable PPA, it cannot reduce its carbon emissions to zero. Modelling by Technische Universität Berlin (TU Berlin) shows that if a company sourced 100% of its electricity through renewable PPAs in Ireland in 2025, it would end up covering only 80% of its hourly demand with carbon-free energy.

“24/7 carbon-free energy means that every kilowatt-hour of electricity consumption is met with carbon-free electricity sources, every hour of every day, everywhere”

PPA PROBLEMS In recent years, this has become a problem for some large energy users, starting with the technology giant Google. The search engine behemoth has technically been carbon neutral since 2007, when it started to completely cancel out its greenhouse gas emissions using offsets. By 2017, the company claimed to be the first large corporation in the world to run all its global operations off renewable energy. It buys a lot, with PPAs for more than 7 GW of wind and solar power output around the world. This has led to challenges. “We started buying a lot of power in areas where we were not connected to the grid,” said Google’s Caroline Golin at the Power Summit event organised by Eurelectric in July 2022. “We were buying a lot of wind in the places where wind was accessible and we were buying a lot of solar in the places where solar is accessible,” she adds. “We didn’t necessarily have a data centre there. That created problems on some grids.” In parts of the United States, “We overloaded the grid with too much wind and then had distribution 44

In Germany, which has a cleaner grid thanks to interconnections with France and Denmark, the level would be higher, but still no more than 90%. Globally, according to a study by McKinsey & Company, the level today is likely to be between 40% and 70%. In a bid to overcome this problem, Google set what it said was its most ambitious sustainability goal to date: that by 2030, it would aim to operate entirely on carbon-free energy, around the clock, at its data centres and offices worldwide. It was joined by others in September 2021 with the launch of the 24/7 Carbon-free Energy Compact, a United Nations-backed initiative to advance power matching policy, procurement, technology, market mechanisms, data and transparency. The Compact now has more than 80 signatories, including companies such as Acciona, AES, Centrica and EDP and organisations such as the African Circular Business Alliance, the City of Des Moines in the US and the Government of Iceland. “24/7 carbon-free FORESIGHT

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Hot property Global corporate PPA volumes have grown rapidly between 2008 and 2021

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energy means that every kilowatt-hour of electricity consumption is met with carbon-free electricity sources, every hour of every day, everywhere,” says the United Nations. “It is both the end state of a fully decarbonised electricity system, and a transformative approach to energy procurement, supply and policy design that is critical to accelerating its arrival,” it adds.

MATCHING CATCHES Yet despite mounting interest, 24/7 power matching remains problematic in practice, with only very large organisations having the capacity to act as off-takers and just a handful of energy suppliers able to meet demand. The issue is not the availability of renewables such as wind and solar, which were installed at record levels in 2021. Nor is it the ability to trace where renewable energy comes from. Companies such as FlexiDAO of Spain and Powerledger of Australia use blockchain techFORESIGHT

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nology to track renewable energy production. In Europe, meanwhile, Guarantees of Origin have evolved into so-called granular certificates, which carry time and location stamps. “Granular certificates are the building block of 24/7,” says Douglas of Eurelectric. The problem is that having traceable, certifiable renewable energy supplies on an hourly basis is only useful while the sun is shining, or the wind is blowing. In this respect, 24/7 power matching narrows companies’ procurement focus on times when renewable energy is not available—but cannot yet stop these times from happening. “It is very important to recognise that exploring 24/7 PPAs is not about getting to 100% 24/7 power-matched or carbon-free energy today,” says Eloise Moench of FlexiDAO. “Whereas most corporate energy buyers may be able to reach an 80% or 90% 24/7 carbon-free energy target with their current PPAs, the renewable energy technologies needed to reach 100% are not commercially viable right now.” 45

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STORAGE STRUGGLES The models developed at TU Berlin illustrate the scale of the challenge in achieving clean energy power matching around the clock. The researchers looked at whether adding batteries to their Irish grid scenario would help. Small amounts of battery storage could allow a company to meet up to 90% of its hourly demand with carbon-free energy and without a significant increase in cost. To meet 98% of hourly demand, the company would need to pay a 38% premium over current, annually matched rates. To cover the last 2%—roughly one week a year—would more than double the cost. “If you had unlimited financial means, you could easily solve this. The storage is there, it’s just not feasible—no one would pay that money for it,” concludes Christoph Wan-Hörbelt of Ørsted Wind Power Germany. The TU Berlin team modelled two other scenarios, both involving technologies that are not currently available at scale. In one, batteries were complemented with long-duration storage in the form of low-carbon hydrogen stored in caverns, which was assumed to have a cost of €2.50 per kilowatt-hour. 46

This significantly improved the picture, theoretically allowing a company to meet 98% of its hourly demand with carbon-free energy at a 20% premium over annually matched supplies. Meeting 100% of hourly demand would involve a 34% cost uplift. Things were even better in a model that included a dispatchable form of carbon-free energy. For this, the researchers chose to add advanced geothermal to the mix. Advanced geothermal technologies aim to tap into the heat stored deep in the Earth’s crust and use it to produce electricity as and when needed. The concept has great potential but is also still at the research and development stage. Assuming an overnight cost for advanced geothermal of €10,000 per kilowatt, the TU Berlin team found it would be possible to match hourly demand with carbon-free energy at practically no extra cost compared to today.

BIG IMPLICATIONS Tom Brown, who led the research at TU Berlin, says the model achieved similar results for other early-stage low-carbon dispatchable technologies, such as advanced nuclear and gas with carbon capture FORESIGHT

Partial solution Having rooftop solar will not always mean a company is using renewable energy to power its operations

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and storage. “Dispatchable technologies can limit this cost rise at 100% [hourly matching], but who knows if these technologies will actually appear at the cost levels their promoters think they will by 2030?” he says. This research has several important implications for the wider energy transition. The first is that if 24/7 power matching with 100% clean energy is not possible within corporate PPAs today then it may not be possible for future decarbonised grids unless new technologies are developed.

“It is very important to recognise that exploring 24/7 PPAs is not about getting to 100% 24/7 power-matched or carbon-free energy today”

This is significant because decarbonised grids will be needed to enable the electrification and decarbonisation of sectors such as industry and transportation. Given that the Intergovernmental Panel on Climate Change has set a target of net-zero greenhouse gas emissions by 2050 and a halving by the end of this decade, there is not much time left. Eurelectric’s Douglas says the industry body is confident European grids will be fully decarbonised by 2040, but Europe will likely be ahead of most other regions worldwide and achieving this goal will not be easy. European distribution and transmission system operators will need to invest €400 billion by 2030, says Douglas, to accommodate 750 GW of new wind and solar capacity, along with infrastructure for vehicle electrification and demand response. The 750 GW is equivalent to 80% of the total generation capacity installed in Europe today, he adds. Fortunately, a second implication of corporate attempts to achieve 100% clean energy hourly power matching is that the work could be very useful in highlighting where technology research and development spending should go.

GRID CONSIDERATIONS It is clear, for instance, that batteries can only play a limited role in helping to decarbonise grids around the clock. This would seem to partly justify efforts in Europe and elsewhere to support the development of low-carbon hydrogen. Based on the research from TU Berlin and elsewhere—Princeton University, supportFORESIGHT

ed by Google, has modelled similar scenarios in the US grid—it would appear more work is also needed on dispatchable technologies. However, enthusiasm for these more speculative technology options must also be tempered by their potential for failure and the long lead times they could require for commercialisation. Furthermore, the price sensitivity of the models based on carbon-free dispatchable technologies indicates that the most sensible way of achieving hourly power matching might be through a portfolio approach rather than a single technology. Clean energy portfolios will also need to consider the availability and impact of demand response. If one of the problems in matching hourly supply and demand all year round is that there is a week with little solar or wind power, it might be possible to avoid the high cost of dealing with that period simply by transferring operations elsewhere. Proponents of 24/7 power matching say the concept is valuable not only because it helps PPA customers to improve the credibility of their emissions reduction plans but also because it will help stimulate further research that will benefit the grid. Another advantage is that it could help corporations to further hedge against power price variations, by eliminating periods when energy cannot be sourced through a renewable PPA.

ANOTHER APPROACH However, as Berg of S&P Global noticed, it is also true that not everyone is in favour of meeting every hour of demand with carbon-free energy. Critics of 24/7 power matching believe that if the aim is to cut carbon emissions as quickly as possible then money invested in trying to meet the most challenging periods of demand would be better spent on bringing clean power to dirtier grids. In this alternative approach, called emissionality, “You don’t focus on getting that last ten to 20%, but you focus a little bit more on bang for buck on emissions reduction,” says Brown at TU Berlin. “Let’s build the wind and solar in Poland or Mongolia, where they have a dirty coal fleet, rather than trying to be lilywhite angels for our own consumption.” Emissionality makes a lot of sense and may indeed be a better focus for investments today, but with it “you don’t support the technologies which you will need later,” Brown says. “I think it’s totally fine that both approaches are being pushed in the corporate sphere,” he adds. Wan-Hörbelt of Ørsted says: “The work needs to be done, no matter what, until we have reached 100% renewable energy in the system. We do need to go through this period of learning.” • 47

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Carbon prices at sufficiently high levels can push firms to internalise the costs of greenhouse gas emissions while providing a long-term price signal to drive investments needed for decarbonisation. Emission trading systems and carbon taxes feature in a growing number of climate strategies, but even the most well-designed instruments must be accompanied by other policy measures if emissions reductions goals are to be reached

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TEXT Heather O'Brian PHOTO Parrish Freeman and Ricardo Gomez

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he price for emission allowances on the European Union’s Emission Trading System (ETS) approached €100 per metric tonne of CO2 in both February and August 2022, the highest level since the market’s establishment in 2005 and well above the €8/tonne level they had traded at as 2018 began. Market gains for the EU ETS over the last four years have accompanied measures to tighten up the rules of the trading platform and more ambitious EU policy measures, notably the 2021 “Fit for 55” package aimed at reducing the bloc’s emissions by 55% in 2030 compared to their 1990 level, up from the previous target of a 40% emission cut. Economists like the idea of putting a price on greenhouse gas emissions, arguing that it is a cost-effective lever for meeting emission reduction goals. The principle is that the “polluter pays”, internalising social, environmental and economic costs of global warming that previously were borne by society at large. This in turn should provide an incentive for emissions abatement and investments in lower carbon alternatives. The EU ETS is a cap-and-trade scheme, where a cap is placed on greenhouse gas emissions of participating sectors that is tightened over time so that total emissions fall. Market participants—which currently include power utilities, industrial facilities and the intra-European flights of airlines—buy or receive allowances. Low emitters can sell their allowances on the market to those who pollute too much, encouraging the most cost-effective decarbonisation to proceed first. “We see the ETS as the cornerstone of EU climate policy and the key tool to reach the emission reduction objectives of 2030 and beyond,” says Marion Labatut of French energy group EDF.

EXPANDING TOOL While the EU ETS was the first international trading emission scheme and is also the largest in terms of trading volumes, the bloc is far from alone in using carbon pricing. As of April 2022, there were 68 carbon pricing instruments globally and three more scheduled for implementation, including 37 carbon taxes and 34 emission trading systems, figures from the World Bank show. 50

Following the establishment of a national ETS covering electricity generators in 2021 in China, the world’s largest emitter, carbon pricing mechanisms now cover about 23% of global emissions. In the United States, the world’s second-largest emitter, plans for carbon pricing at the national level have gone nowhere, but there are state-wide and regional initiatives.

TAXES VS TRADING ETS mechanisms come with the advantage that a trajectory can be set for emissions reductions although there is more uncertainty on price levels. Carbon taxes have the benefit of price certainty and are more straightforward to implement, but new taxes can be unpopular or difficult to put in place. In 1991, Sweden became one of the first countries to implement a carbon tax, initially setting a rate of SEK 250 per tonne of CO2 emitted and gradually increasing it to SEK 1200 per tonne in 2022. According to the Swedish government, “By increasing the tax level gradually and in a stepwise manner, households and businesses have been given time to adapt, which has improved the political feasibility of tax increases.” Canada has also taken a stepwise approach to a federal carbon tax, which is set now at C$50/tonne and is scheduled to rise to C$170/tonne in 2030.

THE PRICE OF CARBON The High-Level Commission on Carbon Prices identified a $50-100/tonne range as the price needed by 2030 to keep global warming below 2°C—the upper end of the limit agreed in the 2015 Paris Agreement on climate change. Yet, the World Bank notes that less than 4% of global emissions in 2022 are covered by a direct carbon price at or above this range. After years of low prices, emissions allowances on the EU ETS have changed hands at a price over €80/ tonne for much of the year, while S&P Global expects allowance prices to exceed €100/tonne from 2025 as the bloc accelerates with its net zero goals. More ambitious targets may require higher carbon prices. Simon Dietz from the London School of Economics and other researchers found in a 2018 study that limiting the global temperature rise to 1.5°C by 2030 could require a median price of $145/tonne in 2005-dollar prices. That would be equivalent to about $220/tonne today. FORESIGHT

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Edward Baker of Principles for Responsible Investment (PRI), a United Nations-supported network of financial institutions, points out that the height of carbon prices will also depend on the chosen decarbonisation pathway. If the focus is on renewable energy, prices needed are likely to be “a lot lower” but countries looking to maintain a more sizeable role for oil & gas and carbon capture and storage (CCS) could require significantly higher prices, he says.

THE PRICE IS RIGHT Getting the carbon price right can be complicated. While low prices can reduce the effectiveness of carbon pricing instruments, prices considered excessive are also problematic, particularly at times when households and businesses are already worried about high energy bills. The Net Zero Asset Owners Alliance (NZAO), composed of 73 institutional investors with combined assets of $10.6 trillion looking to decarbonise their portfolios by 2050, recently laid out a vision for how carbon pricing should be overhauled. Its roadmap includes expanding carbon pricing and raising the long-term price signal on existing markets but also stresses the importance of predictable increases in prices, noting that rapid increases in carbon prices could erode political support. “A clear price signal provides companies and investors with greater certainty regarding future price levels for efficient capital allocation,” the NZAO says. “It also creates stable and reliable incentives for investors, companies and consumers to adopt or develop low or zero-emission technologies or practices.” In emission trading markets, where the intersection of supply and demand sets the price, policymakers can help provide predictability by setting price floors and ceilings that increase gradually over time.

Pricey carbon Heavy industries are encouraged to reduce their emissions through the introduction of carbon taxes

CREDIBILE THREAT Patrick Bayer from the Centre for Energy Policy at the University of Strathclyde believes that the higher prices now seen on the EU ETS will lead to an increase in sustainable investments, but notes that even low carbon prices can lead to emissions reductions and encourage “greener” investments if there is a credible regulatory system in place. In a 2020 study, Bayer and Michaël Aklin of the University of Pittsburgh found that sectors covered FORESIGHT

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by the EU ETS emitted 11.5% fewer emissions between 2008 and 2016 than they would have in a world without ETS, even though prices at the time were low. “If you have certainty that carbon pricing will continue then it might make sense to invest today instead of waiting before prices rise €150 a tonne,” adds Bayer.

INVESTMENT DRIVER Drawing a direct connection between carbon pricing and specific investments can be complicated, although there is some evidence it drives some investment activity. One 2016 study showed that patents in sectors covered by the EU ETS were up to 10% higher than those in other sectors. A 2018 survey of Chinese businesses showed that 75% expected the ETS would affect investment decisions. The environmental think tank E3G and the Jacques Delors Institute found that the EU ETS has driven some incremental clean innovation investments that were already close to the market, accelerating a shift away from some technologies in the power sector set into motion by other measures, like support for renewable energy.

To pave the way for the phase-out of free allowances, avoid carbon leakage and ensure a level playing field for its companies, the EU is planning to put in place a Carbon Border Adjustment Mechanism (CBAM). Initially, imports into the EU in five sectors—iron and steel, aluminium, fertilisers, cement and electricity—would have to comply with reporting requirements on emissions. Starting in the latter half of the decade, goods imported from countries outside of the EU ETS would have to pay a levy at the border based on embedded emissions. Goods from those countries with their own direct carbon pricing system would receive a rebate equal to the carbon price already paid in the country of origin.

“Carbon pricing alone won’t get us to where we need to go in some sectors”

THE FRUITS OF CARBON Carbon taxes and emissions trading are also a source of government revenue, which can be funnelled back into investments in innovation needed for decarbonisation and to address distributional and social issues associated with putting a price on carbon. Carbon pricing revenues in 2021 rose to $84 billion, about 60% higher than the year earlier, according to the World Bank figures, with revenues from ETS mechanisms surpassing that of carbon taxes for the first time. An ETS set to be deployed in the state of Washington in the US in 2023 is billing itself as a “cap-andinvest” system, as proceeds from emission allowance auctions will be earmarked for investments in climate resiliency programmes, clean transport and addressing health disparities. California claims to invest billions of dollars in emission reduction projects with funds from its ETS.

CARBON CLUBS Carbon leakage occurs when firms relocate to countries with less strict emissions constraints and lower compliance costs, which could lead to an increase in total emissions. To address the risk of carbon leakage, the European Commission has provided a higher share of free allowances for companies in high-emission, trade-exposed sectors. This, however, has dampened the price signals on the ETS. 52

The response of trade partners has been mixed, with Brazil, China, South Africa and India calling it discriminatory and some observers calling for a more collaborative approach. The new mechanism would also need to be compliant with World Trade Organisation (WTO) rules. Frans Timmermans of the European Commission has expressed confidence that a growing number of countries will take comparable measures to decarbonise their economies, “Which would make the introduction of CBAM not necessary, or only in a very limited way.” Japan and Canada are also considering CBAMs, while California already has an adjustment mechanism for electricity imported into the state. “These border adjustment mechanisms flow from the idea that if we have clubs, then everyone else will have no choice but to flock to them,” says Lee Beck of the Clean Air Task Force (CATF), a US-based non-profit. “But in reality, decarbonisation is driven by regional and local political economies.”

COSTS AND BENEFITS Governments are not the only ones seeking to put a price on the cost of greenhouse gas emissions. A growing number of companies and financial institutions are also looking to incorporate carbon costs in investment decisions. FORESIGHT

FINANCE

Dual threat Evolution of global carbon pricing revenues over time

ETS revenues surpass carbon tax revenues for the first time

Billion USD $90 $80 $70 $60 $50 $40 $30 $20

SOURCE: World Bank

$10 $0 2016

2017

2018

2019

CARBON TAX

The European Investment Bank (EIB) uses a shadow carbon cost as part of the cost-benefit analysis made when it assesses whether to provide financial support to projects. The EIB’s shadow carbon cost now stands at €120/tonne and is seen growing to €250/tonne in 2030 and €800/tonne in 2050. The figure reflects modelling of the level CO2 prices would need to reach to limit the global temperature rise to 1.5°C if governments gave themselves only one instrument to achieve that, explains Edward Calthrop of the EIB. Calthrop notes that governments actually pursue a variety of policies. Some countries participating in the EU ETS also apply carbon taxes while there are also costs associated with implementing the EU’s Renewable Energy Directive and Energy Efficiency Directive, for instance.

WAKING UP “[Companies] have had to wake up to the long-term trend of carbon pricing,” Calthrop adds, which wasn’t FORESIGHT

2020

2021

ETS

being taken seriously when prices on the EU ETS were hovering below €10/tonne. Companies are also increasingly being asked by investors to explain how they will continue to do business with a high carbon price. “There was a time when there was a very focused discussion around oil and gas majors and coal-fired plants and now this has extended to high-emission industry and the agricultural space,” Calthrop says. It may be difficult for companies in hard-to-abate sectors like cement or steelmaking to present credible decarbonisation strategies, which depend largely on factors such as technological and process innovation, green hydrogen and carbon capture and storage (CCS), he notes.

CARBON CONTRACTS FOR DIFFERENCE While prices on the EU ETS have increased significantly over the last few years, they may still not be sufficient to spur sufficient investments in emerging technologies like green hydrogen and CCS. 53

FINANCE

Carbon pricing around the world Absolute emissions coverage, share of emissions covered, and prices for CPIS across jurisdictions

CARBON PRICE USD/TCO2e

140 Switzerland

Sweden

120

United Kingdom

EU ETS

100

Finland*

80 Switzerland

France

Netherlands

Ireland* China National ETS Denmark*

Germany

United Kingdom Spain

Latvia

Kazakhstan

RGGI Argentina* Colombia

Portugal

Mexico*

Chile

Poland

0 0%

20%

40%

SHARE OF GHG EMISSIONS COVERED IN THE JURISDICTION

CARBON TAX

FORESIGHT

ETS

FINANCE

Liechtenstein

Norway*

New Zealand Canada**

Luxembourg* Iceland Rep. of Korea Slovenia Japan

South Africa

Ukraine Singapore

SOURCE: World Bank

60%

80%

BUBBLE SIZE REPRESENTS ABSOLUTE COVERED TOTAL GREENHOUSE GAS EMISSIONS. *For CPIs that have multiple price levels, the price applying to the larger share of emissions is used. **This is a composite presentation representing total emissions covered by carbon pricing instruments under the Pan-Canadian Framework. It includes a combination of ETS-like and carbon tax-like instruments, implemented at both provincal and federal levels.

FORESIGHT

FINANCE

The European Commission has announced plans for the rollout of carbon contracts for difference using cash from its Innovation Fund to support green hydrogen use in industry, like the contracts for difference successfully used for renewable energy. In this case, if the emission allowance price falls below an agreed strike price, the government would top up the difference. Should it go above the price, the recipient of the contract would have to pay the difference back. The concept of a carbon contract for difference was applied in the SDE++ auction in the Netherlands in 2021 to the Porthos project to capture CO2 from industries present at the Rotterdam port and transport it via pipeline for storage in empty gas fields. The Dutch government has earmarked €2.2 billion to bridge the gap between ETS costs and the total investment cost for capturing, transporting and sequestering CO2 and expects to be receiving payments when ETS prices increase in the future.

JUST TRANSITION The EU is looking to extend emission trading to the buildings and transport sectors with the creation of a separate emissions trading system focused on companies that supply heating and road transport fuels. There are concerns, however, that the extra cost could just be transferred to consumers. Low-income households, which spend a higher percentage of their income on energy and have less money to invest in energy efficiency, would be hurt most. With carbon pricing, the main element in ensuring equity is to, “Make sure revenues are redistributed to the ones that need them the most, the most vulnerable households and enterprises,” says Pauline Mathieu of EDF. Mindful of the potential social impact of carbon pricing, the European Commission plans to use some of the funds from the new ETS to set up a Social Climate Fund to finance short-term direct support to vulnerable households and investments in road transport and buildings, principally to benefit vulnerable households, micro-enterprises and transport users. In Canada, most proceeds from the federal carbon tax are returned to families in their tax returns through what are known as Climate Action Incentive payments.

NO SILVER BULLET “Carbon pricing alone won’t get us to where we need to go in some sectors,” notes Labatut of EDF. A case in point is transportation, where a high carbon price is unlikely to lead to the necessary rollout of charging infrastructure for electric vehicles, she says. The European Alliance to Save Energy, a business-led alliance to promote energy efficiency, has 56

stressed that, “Carbon pricing in the building sector can only work effectively and efficiently as part of a well-designed broader policy mix.” Even if a fuel switch is achieved, carbon prices are expected to have a limited impact on renovations, it says. The World Bank argues that carbon pricing should be implemented as part of a policy toolbox that includes public investments in infrastructure, technology and innovation and regulations like building standards. According to the High-Level Commission on Carbon Prices, “Carbon pricing by itself may not be able to induce a transition at the pace and on the scale required for the Paris target of “well below 2°C” without unacceptable costs and distributional impacts. It is theoretically both unsound and impracticable to rely on carbon pricing only.” • FORESIGHT

Road tax The EU is looking to extend emission trading to the buildings and transport sectors

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BUSINESS Local community groups are often seen as being against renewable energy sites or other projects to support the energy transition. But there is a rise in different ownership and funding models that includes local residents who do want to support the quest for a decarbonised economy

“Wind turbines in the landscape are pretty ugly, but when you own them yourself, they’re pretty beautiful,” quips Danish community energy advocate Halfdan Abrahamsen. Abrahamsen is project manager of Ærø EnergyLab, which manages energy projects on the Danish island of Ærø, south of the mainland. Ærø island was a pioneer of community energy in the 1980s, when interest in energy self-sufficiency was high following the 1970s oil crisis. The island has 11 wind turbines, more than enough to power its own needs, including an all-electric car ferry; and three district heating systems. The system is owned by residents of the island, who buy shares in it when they buy a home there. Ærø was one of the first community-owned energy systems, but many others have since been developed, particularly in Europe. There is no official record of community projects, but a 2019 report by the European Commission’s Joint Research Centre estimates the number at 3500 across the continent, while the International Renewable Energy Agency (IRENA) cites 4000 globally. Neither is there a single definition for community 58

energy. Many different models exist, including co-operatives, partnerships between developers or utilities and local people, non-profit organisations and community trusts. But what they all have in common is that they involve communities in decision-making and benefits sharing in energy projects.

REDUCE DELAYS Proponents cite many benefits of community energy, including empowering and uniting local communities, keeping investment within local areas and promoting a better understanding of energy consumption. But one of the main reasons the idea has the support of many governments and energy companies is that they are perceived as reducing local opposition to developments and therefore delays and expense from legal cases. Whether a community opposes or accepts a renewable energy development is often a matter of perception, Abrahamsen believes. “When you look across the landscape and you see a wind turbine where there wasn’t one before, you feel you’ve lost something. But if you own it yourself, you perceive it FORESIGHT

Neighbourhood watch Community involvement in renewables can attract invesment and fast-track permitting

TEXT Catherine Early ILLUSTRATION Luke Best PHOTO Haytem Gataa and Pop & Zebra

Community cash to boost the transition

FORESIGHT

BUSINESS

Community energy around Europe

Clos Neuf France

Westmill Solar Park England Westmill claimed to be the first and largest community owned solar park in the world when it opened in 2012. Set on 12 hectares, the 20,000 PV panels generate 4.8 gigawatthours per year. It is run by a cooperative, which also offers grants for community projects within 40 kilometres of the project site. The project was unanimously approved by the local council’s planning committee, having received no objections.

The 12 MW Clos Neuf community-owned wind farm opened in September 2022. Developed by German renewable energy developer BayWa. Local and regional residents invested €1 million into the project, contributing €500,000 as shareholders and another €500,000 as bondholders, alongside financial institution Banque des Territoires and partner Quénéa. Two-thirds of the investors live within 10 kilometres of the wind farm. Citizen investors are also directly involved in decisions about the management of the wind farm. Two community representatives sit on the project’s committee.

Zeewolde Wind Park Netherlands

Earlsburn Wind Farm Scotland

The Netherlands boasts a wind farm that is both the world’s largest to be community-owned and the country’s biggest onshore wind project. The Zeewolde Wind Park has just been repowered, rising from less than 200 MW generated by 220 turbines, to 322 MW from 91 larger turbines. The repowering was initiated by the municipality, following complaints about the landscape impact of the older turbines, which were scattered unattractively, alongside a desire to produce more renewable energy, explains its director Sjoerd Sieburgh Sjoerdsma. The project is owned and operated by more than 250 residents of the area.

Scotland’s first wind farm with shared ownership was built by Falck Renewables. Citizens of the nearby village of Fintry requested they install an extra turbine as part of the 37.5 MW development that they could own. Profits from the project, which began operations in 2008, are reinvested in the community, for example, paying for household electricity consumption and energy efficiency measures. The Fintry Development Trust which owns the turbine has 200 members out of an adult population of around 500. Energy bills reduced by £90,000 reduction of household energy bills across Fintry.

FORESIGHT

BUSINESS

profits, tax revenues, jobs). Particularly, energy co-operatives contribute to a more democratic energy system and social economic development by creating employment and benefits at local level,” it states. A 2019 study of the contribution of Danish community owned energy projects to the energy transition found that there was significant importance of such models in terms of investment in, and implementation of, decentralised energy technologies. However, trade body WindEurope says that the benefits of such models on community acceptance is well recognised by governments and developers. “There is less opposition because the community has been taken along with the project—they’re aware of what’s going on, they might have participated in the decision-making stage and they’re benefiting from it. So whatever model you use, it usually has a positive effect on public acceptance. Fewer cases end up in court when these models are applied,” says Guy Willems of WindEurope.

MORE OPPORTUNITIES

in a different way—you sacrificed a bit of your view, but you’ve gained independence, security, and if you own a share in that wind turbine, you actually also earn a bit of money,” he says. Research on the impact of community ownership models on community reactions to renewable energy projects is patchy. A 2020 study by Oslo’s Center for International Climate Research and the Free University of Berlin’s Environmental Policy Research Centre concluded that wind farms owned by farmers, landowners, individuals and municipalities often experienced higher levels of trust than those solely promoted by commercial developers. “Community ownership models help to strengthen local identification with the wind farms, to generate local/regional added value (in terms of income/ FORESIGHT

In countries where community ownership is common, contributions to investment in renewable energy can be significant. A paper examining community energy in Germany found that citizens were responsible for 31% of total investments in 2012, or around €5 billion. However, investment in community energy has suffered in recent years, even in Germany and Denmark, as auction-based systems made it difficult for them to access funding. The European Commission now wants member states to boost opportunities for community energy. It believes that by 2030, communities could own around 17% of installed wind capacity and 21% of solar. In addition, while most remain engaged in generating energy, their roles are expanding into energy supply, energy efficiency and electro-mobility, and is likely to continue to disrupt activities traditionally held by energy and car companies. Under the new European Green Deal, the European Union has become a champion of community energy, with an EU directive stipulating that all member countries enact laws that make community energy not only possible, but also profitable. This states that community energy projects have delivered economic, social and environmental benefits to the community that, “Go beyond the mere benefits derived from the provision of energy services”. “This Directive aims to recognise certain categories of citizen energy initiatives at the union level as ‘citizen energy communities’, in order to provide them with an enabling framework, fair treatment, a level playing field and a well-defined catalogue of rights and obligations,” it adds. 61

BUSINESS

Give and take: Local community support from renewables

ommunity benefit funds are a voluntary commitment by a developer to pay into a fund which then finances community projects. Such funds can offer an opportunity for the local community to access long-term, reliable, and flexible funding to directly enhance their local area, economy, society, and environment. The funds can comprise a fixed annual sum paid per megawatt of installed onshore wind capacity, a variable annual payment linked to profit or electricity output measures, lump-sum payments, or a blend of all three. They are commonplace in the renewable energy industry worldwide. In Scotland alone, more than £22.8 million was invested through community benefit funds from renewable energy developers, according to a register run by Local Energy Scotland. Swedish developer Vattenfall has invested £2.5 million in communities across its ten operational wind farms. Its 228 MW Pen y Cymoedd project in Wales is the largest onshore wind farm across England and Wales. It has a community benefit fund with an annual budget of £1.8 million until 2043. It is managed by an independent, locally based, not-for-profit Community Interest Company. As well as community schemes, it is funding restoration of peatland near the wind farm. It is not just developers who offer community benefits—turbine manufacturer Vestas also has a programme of community engagement and benefits as part of its corporate social responsibility (CSR) strategy that was launched in 2020, says Kristian Heydenreich, senior director for CSR at Vestas. “We’re looking at the social licence to operate where we supply turbines for projects,” he says. Effective consultation with communities about projects, and allowing them to benefit is “a bit like an insurance policy”, he explains. “If you look back at

projects that have failed due to community unrest, it’s simply because they failed to obtain and maintain this social licence,” he says. In India, for instance, Vestas funded various projects near a 250 MW wind farm in Gujurat where it was providing turbines, including educational materials for more than 1400 children, arts and crafts training for local women, clean drinking water and improved sanitation facilities across schools and villages, and a vaccination programme for around 5000 cattle. Community benefits are generally less tangible and meaningful than ownership in the long term, says Sarah Merrick, chief executive of Ripple Energy. However, the two could be used together, she believes. “Developers could front load community benefit offerings and then convert that into free ownership of a project for people in the local area,” she suggests.

FORESIGHT

Local benefits Wind projects in India provide community benefit funds to schools or for training courses

BUSINESS

In 2022, the European Commission approved state aid guidelines for climate, environmental protection and energy that allow member states to exempt renewable energy projects owned by communities and SMEs that are below 6 megawatts (MW) in capacity from competitive bidding requirements in auctions. They can also develop wind projects up to 18 MW without competitive bidding.

LOCAL BENEFITS A social science research project funded under the EU-Horizon 2020 programme has studied community owned energy in the Netherlands, Sweden, UK, Germany, Italy and Slovenia to identify the most effective ways for the EU, national and local governments to support new projects to help them meet their potential.

“We see absolutely huge potential in community energy. It doesn’t need to be just about small-scale projects”

The project, completed in 2022, urged politicians to recognise the advantages of community ownership, which include social benefits and energy independence. The researchers also encouraged lawmakers to prioritise energy communities in supportive policies and formal legislation, starting with a clear definition of the term “energy community” to provide legal clarity and to have policies and legislation explicitly targeted at energy communities, including dedicated incentives. Lawmakers should also remove bureaucracy, and legislative and administrative burdens that block community energy, especially those initiated by volunteers with limited finances and capacities to seek legal advice, they said. Some countries have recently changed rules around community energy ownership. In Denmark, developers were mandated to offer at least 20% of turbine ownership shares for sale to neighbours living within a 4.5 kilometre limit under its Promotion of Renewable Energy Act (2009). However, this was abolished in 2021 and replaced by rules mandating developers to provide cash benefits for residents and municipalities. Residents living at a distance equal to up to eight times the tip height of the turbines will receive cash annually. Municipalities will receive DKK 125,000 (€16,000) per megawatt FORESIGHT

installed for onshore, and DKK 165,000 (€22,000) per megawatt for offshore, paid up front when the project goes online. While it is up to the municipalities to decide which local projects to support, they must have environmental benefits. Willems believes that the new rules are an improvement in terms of getting projects developed, since people did not necessarily have money to invest in a project, meaning it could not go ahead. “Community ownership is not necessarily the solution in every situation. It might work here and there, but other forms of benefits are better in some communities or geographical regions,” he says.

UNINTENDED CONSEQUENCES In the Netherlands, the government around four years ago stipulated that there must be local participation in wind farm development. However, this is having unintended consequences, according to Sjoerd Sieburgh Sjoerdsma, director of the Zeewolde wind farm. Sjoerdsma says that people who are wealthy or retired claim to be cooperatives so that the aldermen [on the local council] believe there is local participation. In reality, they behave in exactly the same way as a project developer, keeping most of the profits and giving just a little to the people living near the wind farm. “This is a worrying development. The benefits should stay with people in the vicinity of the turbines, as they are the ones that have the hindrance from the project,” he says. In the UK meanwhile, community energy has had its “most challenging year ever” in 2021 with only 7.6 MW of electricity generation installed, and almost 70 MW of projects in limbo, according to non-profit sector organisation Community Energy England in its annual State of the Sector report. Support mechanisms such as the feed-in-tariff and an urban community energy fund that had previously boosted the sector have all now ended, it pointed out. The government has ignored calls to support the sector’s growth—supported by a cross-party Parliamentary Committee—for example by creating a national community energy fund to mobilise community energy and promote community energy through local permitting, it complained. Despite these setbacks, the community energy sector still raised £21.5 million investment for new projects across the UK in 2021, it said.

CONSUMER OWNERSHIP However, new models of community ownership are finding success in the UK. Clean energy ownership platform Ripple Energy has developed three wind 63

BUSINESS

Power to the people Approximate number of community energy initiatives across nine European countries

NETHERLANDS 500

DENMARK 700

farms under what it calls “consumer ownership”. They are developed and managed by Ripple Energy, but owned by a cooperative society made up of project shareholders that can buy into the project, regardless of where they live in the country. Its pilot 2.5 MW project in Wales began operating in March this year. More than 900 people jointly own around 75% of the site, while a private investor owns the remainder. Ripple has also developed an 18.8 MW wind farm in Scotland, which is 57% owned by 5600 people and 18 business members. A property company owns the rest of the share. It is now working on its third project, for which some 1000 have already reserved a share. All of Ripple’s projects are on a commercial scale. Being able to sell shares all over the country via an online platform enables much larger projects to be developed using investment from the public, explains Ripple’s Sarah Merrick. 64

SWEDEN 200

UNITED KINGDOM 431

BELGIUM 34

FRANCE 70

POLAND 34

“We see absolutely huge potential in community energy. It doesn’t need to be just about small-scale projects. If you have a minority stake in a wind farm or a solar park, then there’s no cap on the potential that consumer ownership can have,” she says. The fact that they genuinely part-own a project is what makes it tangible and appealing to people, she says. Merrick would like to see community ownership formally taken into account in permitting decisions. Ripple became involved with its projects after they were consented. It is now actively looking at other markets it could move into, having been contacted by people in other countries who are interested in the model, she says. “The potential of community ownership is huge, but it’s really important that it steps out of being associated with just small, local projects. We want to get it into the genuine mainstream of the energy market,” she says. • FORESIGHT

SPAIN 33

SOURCE: European Commission Joint Research Centre

GERMANY 1750

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