Getting to the “How” of an Energy-Transition Economy
Getting to the “How” of an Energy-Transition Economy
Senior Advisor to the CEO
Effective November 1, 2023, Dan Barclay will retire as Chief Executive Officer & Group Head, Capital Markets, and transition to a role as Senior Advisor to the …
Effective November 1, 2023, Dan Barclay will retire as Chief Executive Officer & Group Head, Capital Markets, and transition to a role as Senior Advisor to the …
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It is hard to believe how much the climate change narrative has evolved in just a few years to become such an integral part of our conversations with clients; I can say that climate change is now part of the agenda for every CEO, every client, I know.
Where even a year ago we were still hearing about whether net zero by 2050 was even possible, today we are firmly entrenched in the “how” of the energy transition. This is not a vague concept about a vague future. Renewables are mainstream and part of the collective social lexicon. Most people are cognizant about where their energy comes from and are making strategic decisions based on the carbon intensity of their electricity supply.
It is an encouraging testament to the pace of progress even since the 2021 UN Climate Conference in Glasgow. Where before many were just interested in change, today they are committed to it, and it is why we can even discuss how to create a high-growth, clean-energy economy.
Ambition in Action
Evidence of this ambition in action appears across North America, where the Inflation Reduction Act (IRA) enacted by the administration of US President Joe Biden amounts to the single biggest climate action commitment in US history, underscoring the role of policy on the road to net zero.
The IRA creates an investment clarity that other governments might do well to emulate, providing incentives that are consistent, have long-term guarantees and are coordinated across the decarbonization value chain. Importantly, it also underscores that government policy needs to follow the net zero trajectory to which nations have committed.
To reach net zero by 2050, to get sufficient capital to the table, “how” we get there needs to be targeted, policy driven, accelerated and, above all, practical. The world is awash with capital, but the lynchpin of a successful transition will be ensuring it is agile and affordable.
These are some of the guideposts the financial services industry is using to inform its views on what policy makers need to do to address and overcome the challenges and barriers of de-risking private sector investment and driving private capital toward net zero solutions.
I have the privilege of co-Chairing the Net Zero Capital Allocation Working Group (CAWG) steering committee of industry peers which, between now and the end of 2023, will work with Canada’s government to develop practical, targeted strategies to increase the speed and efficiency of private capital deployment for key climate finance programs and to identify ways to magnify opportunities via public capital. The CAWG is part of the Sustainable Finance Action Council (SFAC) of Canadian financial services firms that will also look at carbon pricing, price guarantees, and carbon offset and removal credits to assess the level of finance needed to transition and to increase our resilience to the physical impacts of climate change.
Targeted
Whether it is in North America or anywhere else on the planet, the reality is that the global economy will only reach net zero by 2050 if government policies prioritize investment themes that have the highest impact on GHG reductions and economic growth and that allow private capital to flow.
In pursuit of a high-growth, clean energy economy, financial incentives must be funneled to where the biggest wins can be achieved, so that funds are leveraged for scale and are not diluted across low-impact outcomes.
Electrification coupled with energy efficiency have been identified as “Big Win” areas because they represent the most affordable, reliable, and efficient ways to decarbonize large swathes of the economy. We should prioritize commercially viable, system-wide solutions as we continue to build those earlier stage but potentially high impact technologies that will come into play as the transition gains momentum. Nuclear sits somewhere in the middle of the spectrum, but as we find ways to lower costs it will emerge as a major pillar of the new energy regime. We need to focus our efforts on generating more clean energy and reducing emissions for carbon intensive sectors where we can have the biggest near-term impact. If we don’t get the roadmap for the energy transition right, in an economically inclusive and ‘just’ way, we risk creating a system where there are single points of failure. Among the learnings from the tragic war in Ukraine is just how fragile our global energy system is, and that we need to invest simultaneously in the solutions of today and tomorrow.
Policy-Driven
Affecting North American economy-wide change that is economically incentivized will require a de-risking of investment. To do that, governments would do well to utilize existing financial services and processes to attract private capital and manage fund distribution with financing conditions and market terms that improve deployment speed and customer uptake.
To achieve the scale and market penetration needed for new technologies to flourish and drive a low- and zero-emissions economy, private capital providers must be enabled and equipped with funding structures that unlock sufficient investment for the transition. Policy stability that transcends changes in government is also critical to this process.
The IRA is a good example of policy following where industry is going with bespoke incentives. Take, for example, new tax credits under the Act that will drive investment in carbon capture and storage, a technology that will be fundamental to the transition, but which is not economic today, and help chart a path to decarbonize hard-to-abate industries.
Across our regions, government policies need to address areas from fuel standards and tax rates to programs that deliver long-term revenue guarantees. That includes government guarantees on a fixed price on carbon; carbon price certainty is critical to the low carbon transition because it underpins decarbonization investment decisions and the proceeds help us pay for new energy sources and other climate solutions.
Accelerators and Incentives
The automotive sector is a substantial leader in demonstrating how government policy and incentives can drive massive change.
Similar results can be achieved in other sectors, especially if the private sector and government work together to incentivize people and companies to overcome challenges and barriers to investment. Partnering together, the financial sector and government can show people and businesses why it’s worth taking the risk of changing how they either produce or consume energy, or both.
Fundamental to the ‘how’ of the transition is a focus on identifying solutions and the new market entrants that offer them, like stimulating investment in smaller players in the utility sector as we strive to build resilient electrical grids and infrastructure to support the coming wave of electrification. To hear more about how the automotive and other sectors have reached tipping points, tune in to this Sustainability Leaders’ podcast with Bloomberg NEF. To understand the opportunities and challenges to retrofitting Canadian Real estate for a low-carbon economy, this BMO Climate Institute White Paper is also a fascinating read.
Growing Role of Sustainable Finance
Sustainable Finance is now more firmly entrenched than ever as an essential pillar to good business that transcends industries and sectors.
An important testament to this shift came over the past year or so when Canada’s Bruce Power launched the world’s first nuclear green finance framework in late 2021 and Ontario Power Generation (OPG) followed suit in 2022.
BMO is proud to have been a part of both of those landmark issues.
Our ambition is to be our clients’ lead partner in the transition to net zero, which is why we established our cross-bank, Energy Transition Group and launched the BMO Climate Institute. It’s also why we are committed to working with our peers in government AND the private sector to drive collective solutions.
Also to that end, in July we announced the acquisition of Radicle Group Inc., a Calgary-based, leading developer of carbon offsets that helps organizations measure and reduce emissions. These capabilities will make us a leader in carbon credit development and the environmental commodity market and enhance our commitment to help our clients understand and manage the risks and opportunities of energy transition.
Transforming Demand
Critically, a successful energy transition will still require a radical change in the consumer demand conversation, focused predominantly on restricting supply.
If we focus on ‘how’ to shrink demand for fossil fuels, supply will shrink accordingly. For this to happen, there has to be a recognition in policy and energy regulations, shifting from one way of consuming energy to another. This energy transition is especially challenging as the building of new energy systems must be offset with a reduction in the old. Consumers will need to understand that this could imply higher costs in the near term to avoid significant climate costs in the future. Said differently, consumer acceptance of the energy transition is a significant challenge, as recent events have demonstrated.
We are heading in the right direction, though not as quickly as we need to, especially with a global population that is forecast to hit 10 billion by 2050, resulting in even greater energy demand. Renewable energy production is growing, but not fast enough to meet global growth in electricity demand.
Sensible Transition
The energy transition is a hard problem that will require innovative and compelling solutions that build tomorrow’s economy sustainably. We need to create the right exit from the old economy to ensure the right entry into the next one, and that means a focus on enabling investment in the solutions of today, like incentives for hard-to-abate sectors to decarbonize, and tomorrow.
North American oil and gas producers are leaders in climate-focused innovations and have some of the most ambitious emission reduction targets of any other oil producers, including GHG emissions, air pollutants and other sources. We need to continue to incentivize these and other high-trust producers because they are effective stewards with dependable, transparent ESG standards. The alternative is energy from less regulated producers with a different attitude toward climate change.
How we produce and consume electricity will drive an orderly exit from fossil fuel reliance and toward a system powered by multiple renewable sources of energy that can support massive electrification.
I’ve said it before: the shape of the energy transition is not binary. It’s an AND, rather than either/or conversation. We need to provide energy alternatives, and we need to reduce our emissions across existing energy sources.
Fortunately, the narrative pendulum has swung back to talk of a sensible and just transition, and away from calls for the world to turn off fossil fuel taps overnight. We need to focus on what it will take to achieve an orderly transition, meeting the needs of today while achieving a sustainable future. The time is now. We are aligned on the goal, let’s chart the course and get on with it.
Bloomberg Sustainable Business Summit
PART 1
Reaching the EV Tipping Point
Michael Torrance September 26, 2022
Policy support, improvements in battery technology, more charging infrastructure, and new compelling models from automakers are a few key r…
PART 2
Trade Finance: Tackling Sustainability One Company at a Time
Isabela Teixeira Mendes, Sunil Gupta October 17, 2022
The wave of sustainability sweeping the planet is becoming top of mind for one of the world’s oldest industries, trade finance, rewar…
PART 4
Can U.S. REITs Take the Heat (Wind and Rain)
Doug A. Morrow, Juan C Sanabria, George Sutherland January 03, 2023
Climate change is altering weather patterns in significant and meaningful ways. If these weather events continue to grow in frequency and i…
