Transforming to Net Zero in the NEM

Originally published in Energy Source and Distribution Magazine at https://www.calameo.com/read/000373495ccd115db7c25

Sometimes it can be hard to detect the pace of change.  While political sands tend to shift quietly alongside public sentiment, change which impacts the industrial complex tends to attract a higher noise to movement ratio.  History has shown time and again that small changes which re-distribute industrial rents are hard fought. 

The last 12 months has therefore been nothing short of astonishing. In the world of emissions production, there are three main protagonists; the United States, which produces around 10GT of emissions annually; China, which produces around 6GT of emissions annually; and the United Kingdom, which produces around 5GT of emissions annually.  Australia, for reference, produces around 400MT of emissions annually.  This time a year ago, to make the point most starkly, the United States had made a decision to exit the Paris Agreement and AEMO had selected the ISP central scenario as its most likely. Both are now hopelessly outdated data points.

In late 2020, China’s President Xi Jinping surprised the global community by committing his country to net-zero emissions by 2060.  Three weeks later, the fifth plenary session of the 19th Communist Party Central Committee was held by the Chinese Communist Party (CCP).  Overseen and presided over the Chinese General Secretary Xi Jinping, the plenary session has two overarching functions – to take stock of the outcomes and results of the previous 13th five-year Plan spanning 2016 to 2020, and to consider a proposal for a 14th 5-year plan from 2021 – 2025.   These plans were signed off in April 2021, and make demonstrably clear that the future for energy, at least where China is concerned, looks overwhelmingly green; meeting net zero will require roughly 1900 GW of additional renewable capacity to be built in China alone between now and 2060.  

As the Chinese proverb says “one bee alone cannot produce honey”; China does not stand alone in its commitment to change. Sweden (2045), United Kingdom (2050), France (2050), Denmark (2050), New Zealand (2050), Hungary (2050), China (2060) and Japan (2050) are already committed to net zero and a Biden administration has strongly committed to, and is working with Congress to achieve, a lower carbon pathway.  Australia’s commitment to net zero by 2050 therefore reflects the way in which net zero is being achieved through today’s political and economic architecture; those who won’t commit, stand a real chance of being left in the cold. 

On 1 November 2021, COP26 will take place in Glasgow, a meeting that many consider to be the most important climate conference since COP15 when the Paris Agreement was made. The key word for this event seems to be ‘ambition’, with the main goals of the conference being to set out the contributions each nation or party must adhere to in order to meet targets deemed necessary to limit the impact of climate change.  

In the lead up to COP26, the positions of both China and the United States are particularly important for utilities.  China has both the market size to impact technological costs faced elsewhere in the world, and coupled with a focus on innovation, may break new ground technologically for scale application of new energy systems. China will, for example, add between 30 and 40GW of new solar capacity this year alone, and is estimated to add between 40 and 50GW in 2021. Although this is significant (almost the size of the Australian NEM), it will need to be matched each year to meet a net 2060 target.

With the United States committed to net zero by 2050, President Biden’s American Jobs Plan reaffirms and takes forward commitments made during the election campaign - the US is in the process of committing to USD$174Bn in spending on electric vehicles, as well as the establishment of 500,000 charging stations across the country by 2030.  Achieving net zero in the US will involve reductions in the current level of emissions by 7% each year, which will involve structural change well beyond subsidies alone. 

International Commitments Matter for Australian Utilities

Planning and executing a future within net zero is a game of scenario setting and transformation change, the latter of which involves pain.  In the large number of net zero driven strategy and transformation engagements the authors have undertaken, many have had a common thread of cultural challenge and cognitive dissonance among those most potentially impacted by the change.  Simply put, transitioning to net zero is non-linear; it involves a recognition that the future will no longer be as we thought it would. 

Firstly, a true consensus between the top 5 emitting countries of the world will alter AEMO’s most likely scenario away from the 2020 central scenario and towards the 2020 fast or step change scenarios, which have profound implications for closure timetables, decommissioning budgets and transformational agendas for incumbents. 

Secondly, consensus at this level changes the negotiating positions of very large buyers of goods and services, for example multi-nationals based in Europe, which will increasingly  choose to buy only from those from companies which have their scope 1 and 2 emissions understood and their pathways planned.  It is altogether conceivable that companies will seek to renew contracts with companies they have done business with for years, and be asked for scope 1 and 2 emission statements and commitments. 

Taking Concrete Steps to a Net Zero Transformation

For those companies which use and produce carbon as a significant part of their business, the next 15 years will be a period of profound commercial risk and opportunity.  Navigating from one type of business, funding or supply model to another more suited to the most likely low carbon future scenario will involve changes to almost every facet of organisational structure and approach.  These can range from changes in the way that organisations operate and behave (operating model transformation); changing business models to focus on or incorporate new products or services which involve lower carbon markets (business model transformation); or changes in the underlying cost structures that a company adopts to meet its existing markets (cost transformations). 

In our experience, structuring change for net zero will involve:

• Creating a narrative to support this future state which is strongly aligned to purpose;

• Aligning management and senior influencers fully to both the mission and the future state;

• Being realistic, and investing appropriately, in the cultural journey required to achieve the end state;

• Being realistic and investing appropriately in the execution engine around the transformational; and

• Having a clear and ongoing mind to long term value creation and the re-platforming of the organisation. 

For utilities, a low carbon future will involve changes at all ends of the supply chain; generation mix will alter, transmission architecture will change, distribution systems will become bi-directional, connected and integrated with new enabling and adjacent technology, and retailing will become partnership.  The question of who will win and who will lose is the exam question of the next three years.