How asking the right questions will help navigate the energy transition

Meeting the global demand for energy while playing a meaningful role in emissions reductions is a balancing act that will require energy leaders to think differently about their companies – and their place in the overall energy marketplace.

To help executives better navigate the challenge, EY, Microsoft and the Rice University Baker Institute recently brought together some of the world’s top energy, technology, banking and industrials companies to discuss the latest developments in the transition to a lower-carbon world. 

The Sustainability and the Energy Transition forum, held in Houston in May, offered a wide range of unique insights and opinions. Here are three major areas of focus discussed at the event that every energy company executive can utilize to create a more balanced, strategic approach to the future:

Question No. 1: The world needs energy and wants more climate transparency. How can companies prepare to meet those dual expectations? 

The massive scale and complexity of the global energy market – with decades of investment and infrastructure development in place – makes a full transition to renewable sources slow and challenging. 

Using policy changes to try and speed the adoption of renewables around the globe, especially in fast-growing developing countries, could disrupt local economies and lead to geopolitical turmoil. Ensuring that people around the world have access to the energy they need to improve or maintain modern standards of living is more than just a business or political issue – it’s a matter of equity. That’s why traditional energy companies will continue to play a significant role for decades to come. 

“It’s EY’s view that energy enables every aspect of modern life. However, meeting the demand for affordable, secure, equitable energy while also playing a meaningful role in progress against climate change will require energy companies to think and act differently than perhaps they ever have before. To create an efficient, interconnected and profitable energy ecosystem, extensive public-private partnerships and cross-sector alliances are a must.” – Karen Felton, EY Americas Energy & Resources Industry Leader

At the same time, the pressure on energy companies to reduce emissions, in their own operations and in the products they bring to market, continues unabated. The energy industry already has a unique understanding of how the growing focus on environmental, social and governance issues is impacting investor sentiment and access to capital. Stakeholder expectations are likely to get more stringent in the years ahead, rather than less.

Adding more complexity is the U.S. Securities and Exchange Commission’s proposed climate disclosure rule, which is expected to be finalized in late 2022/early 2023. It is expected to drive more rigor and regulatory scrutiny around emissions data, as we’ve seen many energy companies already communicating voluntarily to meet stakeholder requests. This will require companies to strengthen internal controls and processes around data collection and reporting, as well as work to ensure that data from outside the organization is accurate.

In summary, the new rule will create a steep learning curve and companies will need time to figure it out. That leads to … 

Question No. 2: There is tremendous opportunity in developing innovative systems to drive emissions data collection and reporting. How can companies partner with technology firms to find solutions?

Because of the nature of their business, energy companies need substantial information networks that can utilize evolving technologies to track, monitor and analyze vast amounts of enterprise-wide emissions data. In the near term, that means developing and implementing climate data systems similar to those used for financial accounting or customer relationship management. 

The good news is that technology companies are already innovating around this issue, utilizing machine learning, artificial intelligence and tokenization of carbon credits on blockchain to provide decentralized systems for emissions data and related transactions. Working together, the energy industry and technology firms can develop new ways to combine and analyze multiple data sets with different layers of granularity, giving companies timely, accurate information needed both for reporting purposes and for improving their emissions performance.

There is precedence for this form of “engineering to engineering” collaboration. In recent years, many companies have worked with technology firms to develop proprietary tools for leveraging data sets to make informed decisions around both exploration and reservoir longevity as well as grid maintenance and transparency. That same type of teamwork can bring much-needed consistency to data gathering and reporting.

Elisabeth Brinton, CVP, Sustainability at Microsoft, affirms this idea of teamwork, “Partnering [to solve this problem] is part of our new future. Because none of us have all the answers, all of us can benefit from learning together. Collaboration is key, across industries, to address these issues, problem solve, and spur new ideas. Partnering together we can drive economic value, create solutions, and innovate together.”

In time, with the right tools in place, the industry can develop emissions standards that allow stakeholders to compare performance across partners, operators and assets in a way that’s not possible today.

Question No. 3: What will it take to deploy pent-up capital that wants to invest in new energies, clean tech and other green opportunities?

The biggest obstacle to financing transitional projects today is determining their potential for returns. If the project doesn’t make sense on a spreadsheet, is it still worth doing simply to earn credibility or protect the company’s reputation? For many forms of renewable and alternative energy, the path to economic recoupment is clear – and non-traditional sources of capital are evaluating and investing in these asset classes (along with traditional financing sources). 

For newer technologies and emerging asset classes, energy companies and financing sources are critically analyzing which projects or technologies make the most sense from an environmental and business perspective. It’s not a funding issue, because the money for new energies and green projects is available in many forms, from capital markets and bank finance to government grants, bond funds and corporate funds designed to provide a competitive advantage. And many green energy incentives have bipartisan support in Congress.

Eventually, the industry will coalesce around the options that can have the biggest impact on emissions and begin moving forward. Promising technologies – hydrogen power, carbon capture and small-scale nuclear are a few examples – simply need solid projects and investment to scale up. 

The energy industry will have to think creatively about these types of projects and how they fit into a larger emissions strategy.  Kenneth B Medlock III, PhD and Senior Director, Center for Energy Studies, Baker Institute for Public Policy, affirms, “Technologies that leverage existing infrastructures will be most successful in driving lower-carbon futures.  Hence, incumbent energy firms will remain a central part of energy systems as they transition.  Moreover, measurement and verification of environmental footprints along energy value chains is a growing point of emphasis for investors, and energy companies will continue to advance solutions as they seek to provide energy services in an environmentally sustainable manner while also generating positive returns on investment.”

While certain emissions projects today might not “pencil out” in the traditional sense, they can still deliver significant benefits and be economically viable (and profitable). Changing the incentives behind these projects is the key to unlocking capital.

What industry needs: A both/and approach

For energy companies, successfully navigating the expectations and requirements of the modern energy marketplace isn’t a zero-sum game. To thrive, leaders will need to embrace both pragmatism and innovation. 

Smart companies will focus on their core business, achieving excellence in operations and safety, while constantly innovating to achieve the lowest carbon footprint possible. In the energy transition, transformation will impact every area of a company. Resilient leadership doesn’t require knowing all the answers – it requires asking the right questions. And leaders who are open to asking the right questions – and who are willing to explore new ideas and new ways of working – can create a viable framework for energy companies of the future.