The Next Frontier of Industrial Decarbonisation

Hundreds of top climate scientists across the world believe that global decarbonization is not on track, according to a recent Guardian survey.

Nearly 80% of these experts, all from the Intergovernmental Panel on Climate Change, expect at least 2.5C of global heating, and almost 50% foresee at least 3C. Even more concerning—only 6% believe that the internationally agreed 1.5C limit will be met.

Russell Reynolds Associates recently hosted the twelfth installment of the Energy Matters, People & Money networking series. The event brought together a community of industrialists and investors from across the energy transition ecosystem to discuss perspectives on what is required for the next phase of industrial decarbonization.

Keynote Speakers   

Judith Hartmann: Operating Partner – Sandbrook Capital | Former Executive Vice President and Chief Financial Officer, Engie A person smiling for the camera Description automatically generated.

Jim Barry: Former Chief Investment Officer, Blackrock Alternative Investors | Former Chief Executive Officer of NRT plc

Decarbonization is an opportunity for value creation and differentiation

Decarbonization is much more than a reduction of carbon emissions. It is a powerful value creation lever for enhancing competitiveness and future proofing businesses in a rapidly evolving landscape. Energy companies, for example, are well positioned to support the broader energy transition by increasing the availability of green electricity.

The data centre industry alone accounts for more than 1% of global power consumption and is expected to reach 8% by 2030, according to the IEA. Data centre owners are increasingly signing power purchase agreements (PPAs) for renewable energy, and hyper-scalers are increasingly funding renewable-energy projects to meet future clean energy needs. Microsoft, for example, signed a $10 billion, 10.5GW renewable-energy deal with Brookfield Asset Management. In the United Kingdom, Amazon has supported Scottish Power’s wind farm and is purchasing its entire 50MW output. Coupled with declarations from many technology conglomerates about decarbonization commitments, green data centres and co-location companies remain attractive investment opportunities.

Capitalizing on decarbonization opportunities requires overcoming the technological, financial, political, and regulatory hurdles (which are opportunities themselves!)

The best technology does not win—the deployed one does

While more than $100 billion has been invested into new technologies over the last decade, projects are progressing without the necessary capital flows to fully realize them. Stranded assets are becoming more commonplace and new projects are beginning to fail – beyond first commercial scale plans and investment cycles, and even with secured offtake contracts in some instances.

To address capital challenges, there is need for increased, scalable innovation around financing capabilities

Financing structures, such as hedging tools, de-risking funding, and third-party finance for Energy-as-a-Service business models will be key to scaling capabilities. Additionally, climate product innovation within the insurance sector to better arbitrage capital challenges, (e.g., novel insurance carrier, GreenRE) with the goal of insuring new technologies, enabling banks to lend against the balance sheet of the insurer.

Aim to unlock new business models

Alternative business models have an increasingly significant role to play in decarbonizing business. For example, by 2025, Microsoft plans to have secured PPAs for clean energy to cover all carbon-emitting electricity. Offtake management and demand models will be important for success. Acquisitions, joint ventures, and long-term partnerships should also be accelerated as a lever for business model transformation.

A comprehensive decarbonization effort requires a coordinated approach across governments

Decarbonization has become a complex geopolitical issue. Almost 50% of executives in utilities, oil, and gas cite policy uncertainty as a reason for delaying investment, according to Bain’s 2024 Energy and Natural Resources survey. Some industrial entities have even regressed on their carbon emissions reduction goals, and commitments. More broadly, the poor logic of cooperation between governments around regulatory provisions is a major barrier to transformational change and dampens private sector ability to invest.

What should be on the minds of industrial leaders?

Get off the fence. Take a position on what will prevail in the long-term: Failing to develop a defined, long-term perspective of the decarbonized future is negligent in today’s climate. Industrial organizations must take decisive action to maintain competitiveness and long-term sustainability. For example, French utility ENGIE reshaped its entire portfolio as part of a bold, future-focused decarbonization strategy. This included the decision to exit coal by 2025 in continental Europe and by 2027 globally—despite coal being their largest growth engine at the time—instead, re-investing into renewables.

Develop a collaborative, partnership mindset: Less than 20% of companies are currently on track to reach net zero by 2050, according to research by Accenture. Successful global decarbonization needs intense collaboration. Global stakeholders—across industries and governments—must work together to create a new frontier for the economics, politics, and strategic outlook of the energy transition.

Embrace innovation at pace: Climate is continually changing so delaying before adapting will not work. Leaders must move quickly and creatively in their approach, carving out sufficient space for innovation and establishing a fail-fast culture.

Authors 

• Chris Nicholson is a member of Russell Reynolds Associates’ Global Industrial & Natural Resource Practice, covering the Energy markets. He is based in London.
• Abigail Skerrett is a member of Russell Reynolds Associates’ Global Industrial & Natural Resource Practice and leads the firm’s Global Energy Transition Practice. She is based in London.
• Shola Brown is a member of Russell Reynolds Associates’ Global Industrial & Natural Resources team. She is based in London. 

Please get in touch if you would like to discuss these themes in more detail, and/or attend the next Energy Matters series event on September 25.

We will hear from Franziska Bell (bp, Senior Vice President - Digital Technology) and Ernesto Ciorra (former Enel, Chief Innovability Officer) who will share perspectives on the role of digital and artificial intelligence in the energy transition.