Market and political forces are making emphasis on environmental, social and governance (ESG) practices a business imperative for power and utilities companies. With decarbonization at the forefront, green initiatives are driving industry and enterprise transformation.
Trends, initiatives, investments…and impacts of COVID-19
Five primary forces are pushing transformation for power and utilities organizations according to John Stilwell
, Business Applications principal at Grant Thornton:
- ESG expectations to be community stewards
- Customer experience demands for more interaction and communication
- Data challenges in using data as a strategic asset in compliance and efficiency
- Cost management including new/changing health, safety and compliance requirements
- Disruptions from COVID-19 whether short or long term
“The thought process of four or five years ago was ESG is anti-oil and -gas,” said Kyle Reid
, Grant Thornton Transactions partner. “It’s not.” Instead, Reid said oil and gas companies are learning to embrace ESG and understand their role in the evolution. ESG programs increase an entity’s value in a number of ways, including:
Global investment company BlackRock, the world’s largest asset manager, stated in 2020 that it will not invest in companies that don’t have strong ESG policies.
Transformation manifests in 4 major renewable energy sectors
- Enhanced compliance
- Improved corporate reputation
- Better risk management and related operational efficiencies
- Stronger employee recruitment, retention
- Visibility into new opportunities
- More access to capital by meeting investors’ heightened expectations.
A fast-growing renewable, solar has shown annual growth of about 30% over the last five years. It’s projected to be the largest revenue-generating renewable source in the U.S. by 2025. Grant Thornton Managing Director of Corporate Value Consulting Keith Klemowits
said that the continued decline in semiconductor and manufacturing component pricing, improved electricity production capabilities, efficiencies of scale and reductions in labor are key drivers for growth in solar. Greater investment is expected as solar takes a more prominent position in renewable energy generation. However, because traditional fossil fuels remain plentiful and less expensive, further expansion of solar will take continued political will. Congress extended into October some investment tax credits supporting solar that were set to expire earlier this year, and extended through December 2021 the Consolidated Appropriations Act of 2015’s federal tax credits. “From a political and societal pressure standpoint on carbon emissions,” Klemowits said, “it’s hard to believe that there’s not going to be some type of incentive, whether it’s a tax credit or other form to continue to keep moving this process forward.”
The pandemic has significantly disrupted global supply chains, which will drive down solar capacity from 2020 projections, Klemowits said, but it will still be higher than in 2019. Even with a slowdown now, due to global concerns, the long-term trend is upward.
About 25% of all renewable generating capacity comes through wind. As with solar, decreasing costs for key components such as turbines and increasing economies of scale are driving growth. Also as in solar, investment and production tax credits are key. However, federal credit ended in December 2019 because in that year wind was generating 2.5 times as much power as solar. Many states have set full or partial renewable energy targets; response by power and utilities would be assisted by renewed political support. If offshoring to where winds are more consistent creates efficiencies and economies of scale, and environmental concerns and initial installation costs can be managed, these types of wind projects that will fuel development.
Similar to solar, capacity is anticipated be about 5% less than projected for this year due to the pandemic, but it will be a short-term headwind.
Growth rate has been relatively stagnant — currently less than 1% — but annualized industry revenue is anticipated to rise 2.0% through 2024, to $1.0 billion. Biomass has been around longer than solar and wind and generates close to 40% of total renewable energy. As in solar and wind, biomass development needs support from tax credits or incentives to continue investment profitability. But with criticism about the actual benefit in carbon emission and greater attention given to solar and wind, Klemowits said, biomass will exert a smaller impact going forward.
Biomass has been less affected by the crisis as other energy sources because of the maturity of the sector and the lack of dependence on international supply chains. However, a shift is in process. Because of the decline in the economy and subsequent drop in general need for energy, some biomass business is converting to other purposes — for example, ethanol facilities moving into disinfectant production. The future for biomass is unclear.
Though in its infancy, storage is taking off. Solar and wind on their own contribute only when the environment is cooperating. But with the need for storage increasing and the technology improving, the potential is great. Consider this: in 2017, 700,000 electric vehicles were sold, but concerns about availability of power at peak recharging times held down interest. Improvements in storage are expected to help drive an increase of sales to 5 million by 2025. In general, as component prices come down, storage will be more accessible. For example, Tesla and Panasonic have developed joint ventures to build out the strength of lithium ion batteries. With battery cost reductions of about 40% year-over-year in the last few years and strong growth in residential and commercial sectors, storage is projected to grow at an annualized rate of 42.4% until 2025 and market size $6,860 by 2025.
Supply chain issues are significant. They’re expected to diminish along with the crisis.
Transformation manifests through investors
Investors are playing an enormous role in the transformation from traditional fossil fuel or nuclear sources to greener energy. Only recently, an investment in building a solar field became lower than building a natural gas power plant producing the same megawatt hours. With not only businesses but also federal, state and local governments, as well as municipalities and school districts, interested in decarbonization, zero carbon footprint and carbon neutral goals are rising.
The investment shift away from fossil fuels is ongoing, with more green-dedicated investment funds emerging. In 2020, AvaPartner launched a $400 million fund focused on accelerating decarbonization in the industrial economy. The possibilities of installing solar panels on commercial and industrial centers will reduce power consumption as well as open opportunities to sell power back to the grid. Private equity groups are seeking and backing this kind of innovation.
The crisis has reduced demand for oil and gas, but investment in and production of renewable projects are still showing upticks. Movement continues toward 2040 and 2050 targets of zero carbon footprints and carbon neutrality.
For details about changes in investment focus, as well as support for enterprise transformation through digital solutions and workforce management, register to replay The Role of Power and Utility Companies in Reducing CO2 Emissions
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