This how decarbonisation succeeds in Europe
Although the green energy transformation is a highly complex process for CEOs to tackle, according to Matthias Deeg of Horváth, it is also highly achievable
Decarbonisation is central to tackling climate change – it is essential to the future of our planet and a necessary objective on our path to a carbon-free economy. Unfortunately, numerous companies across Europe still don’t have a clear climate strategy or a tangible plan for decarbonisation – many of these companies haven’t set themselves any targets regarding minimising their own carbon emission rates. For example, Horváth recently conducted a study in which we looked at the biggest industry in Germany, energy.
A sector with an accumulated €600bn revenue p.a., yet only 35% of the approximately 1,000 market players have developed or communicated their climate and decarbonisation strategy.
There is an urgent need for action here. Yet, the transformation is required across virtually all industries, and this cannot simply take place overnight. Therefore, companies should start acting now. Even the companies that already set their targets in some cases have not sufficiently considered all relevant aspects, for instance, whether these targets are set to achieve carbon-neutrality or carbon-free production.
Closing the gaps in the policy
The example of energy in Germany has similarities across Europe: the basic conditions are set, but there are still gaps in the government’s decarbonisation concept. Horváth expects that the Federal Republic of Germany must invest about €70bn annually in new energy plants and the conversion of existing industrial plants by 2045. This amount can be broken down into about €20bn being invested annually in renewable energies and another €5bn for the recharging infrastructure (e-mobility). Almost €10bn should flow into green buildings as well as a new power grid infrastructure during the coming years. However, German industry will have to contribute the largest amount of investment by far to its decarbonisation process.
The financial instruments exist, but the framework required for asset heavy technologies to realise decarbonisation (e.g. hydrogen/gas grid development, charging solutions) is missing. If hydrogen is to be key, then there is also the challenging question of where it will be imported from? The government is being called upon to secure quantities from countries and regions such as Norway, Russia, the Middle East or North Africa. These are all vital points and challenges that pave the way towards a post-fossil economy.
The EU’s taxonomy for promoting a sustainable economic transformation
The EU’s new taxonomy is the key instrument for sustainable transformation. Up to €800bn will be allocated for the green transformation of industry over the next ten years. Incidentally, 2021 was a record year for sustainable finance, with green bonds worth $475bn being issued just in Europe. A huge share of this was allocated to green government bonds. This means that a huge number of investors are willing to invest capital in sustainability and clean energy. Financing sources are available, which subsequently leads to companies being willing to invest in minimising their CO2 footprint.
There is no alternative: companies will be only evaluated as sustainable if they meet the taxonomy criteria. Each company that wants to be classified as sustainable and operating ecologically must complete this intensive preliminary work. A comprehensive strategy is needed as the basis for financing and identifying its own internal capabilities for the necessary decarbonisation processes. Naturally, a company’s profitability should not suffer in the process; rather, the objective is that sustainability and climate protection should both increase profitability.
The expertise for a carbon-free economy
The challenge that companies face is to align their own activities with the uniform and transparent standards of the EU taxonomy. Currently, this only affects large capital- and market-oriented companies. However, as a result of the new directives, a significant proportion of companies will be affected by the taxonomy within the next two to four years. Integrating the taxonomy standards will become a major effort for many industrial and energy companies. In addition, industry-specific interpretations, as well as high reporting standards and integration into an already automated ESG management system are currently tying up a lot of company resources. Simultaneously they need many innovations to be implemented in their internal processes. External help will be essential. As experts in decarbonisation, our consulting teams at Horváth support companies from a wide variety of industries develop investment plans and roadmaps and calculate their refinancing needs. Nevertheless, we as a society have a great opportunity based on the taxonomy to lead by example and set the standard for a sustainable economy on a global level.
Further external challenges for the green transformation, in addition to the internal requirements, have to be managed. Currently the power generation capacity and hydrogen (H2) production within Europe are not sufficient – which means that we still depend on other markets, and we will have to get this under control in the long-term.
Furthermore, clear rules and certification regulations for global industrial partners to uniformly decarbonise the supply chain are missing. The EU now classifies natural gas and nuclear power as being sustainable. However, they must meet strict requirements to be considered sustainable and to comply with the standards. Exactly what this will mean in practice is still unclear.
No-one can predict which technologies will ultimately prevail – i.e. will it be the battery or the fuel cell that ultimately wins the race in the mobility sector? Developments in this sector are uncertain and companies lack planning security. Nevertheless, a specific decarbonisation strategy can be established with the necessary expertise. Our experts will help set the course using their experience and knowledge. They will help to ensure that the strategy does not neglect competitiveness and profitability – and present further conditions for successful decarbonisation and ultimately ensure successful sustainability management.
The right approach for every industry
Different approaches to driving decarbonisation within the different industries are possible. Our teams of experts can support industrial companies in the chemical industry in replacing their existing grey hydrogen by converting it into green hydrogen. In the future, refineries will see an opportunity – due to the lack of use of conventional fuels – to take over hydrogen production as an important part of value creation.
Further examples are the steel and metal industries. Green hydrogen, and using green blast furnaces to launch the first green steel, could make the classic coal blast furnace obsolete and ultimately lead to climate-neutral steel production. Changes in the industrial landscape by using green hydrogen are already foreseeable today: in Spain and Sweden, sponge iron – a preliminary stage during steel production – is already being produced 30% cheaper than in Germany and is then refined by the supply chain closer to the final production stage. A Swedish production test has shown that it is possible to use fossil-free hydrogen gas to reduce the iron ore instead of using coal and coke. Hydrogen-based reduction will be a turning-point between conventional and fossil-free steel production. The sponge iron produced in this way will virtually be the raw material used in the climate-neutral steel of the future.
Another focus is on decarbonising entire industrial sites by replacing gas with hydrogen, which can also be used for heating and supplying oxygen in clarification plants during its production. A more intensive use of electricity from renewable energies by applying Power Purchase Agreements (PPAs) will also contribute its share to decarbonisation: falling hydrogen production costs will massively accelerate both the imported and produced quantities of hydrogen, but at the same time this will make using it more attractive, i.e. in the mobility sector. As part of the energy transition, PPAs will be a relevant approach to financing and operating power plants independently from the Renewable Energy Sources Act and to supplying consumers with green electricity in the long-term. Our experts will support companies in this sector, as well to work out which strategy will be the right one to implement.
Take advantage of decarbonisation opportunities today
A look into the future shows the possibilities for not only decarbonising industries but entire logistics chains as well. This can be managed by having goods collected and transported by fuel cell-powered trucks and trains or by gas-powered ships. This should be possible and is worthwhile pursuing.
Reducing carbon dioxide emissions and turning to alternative energy sources is essential at an economic level for a climate-friendly future. Companies can realise this through a clearly defined vision and by working with the right consultancy partner. In order to remain competitive and profitable in the future they need to start taking the first steps towards decarbonisation today, wait until tomorrow and it might be too late.
About the author
Matthias Deeg is Partner in the Competence Center Energy, Environment & Telecommunication and expert on green transformation at the international management consultancy Horváth.
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