For over a century now, the world has been hurtling towards a catastrophe of human making. However, it is only in recent decades that we have come to estimate its effects. COVID-19 has further emphatically proven to us that global catastrophes are not just scenarios and can actually play out. This year industry discussions have additional significance as the world is seized with the imperative of decarbonisation. In reference to this, KPMG in India has launched a report titled “Decarbonising growth – Managing the transition” at its 11th annual energy conclave ‘ENRich 2020’ which has commenced today and will continue till tommorow which highlights the importance for businesses to identify their strategies and portfolios of technologies to meet their respective Net Zero targets. It further discusses the imperatives of decarbonisation highlighting the requirement of a system perspective that incorporates energy demand management, improves energy efficiency and increases the share of clean energy in the overall energy mix.
Sharing his views on the theme of the report, Anish De, Partner and National Head – Energy Natural Resources & Chemicals, KPMG in India said, “Global environmental damage especially over the past century have taken us close to a point of no return. Perhaps we have a small action window to contain severe and irreversible damage across the board. But for this, governments and businesses have to set and act on specific and ambitious goals with set dates. Net zero is a key goal that many nations have explicitly committed to. It helps set clear direction and pathways to the ultimate objective of preservation of the planet. Our Thought Leadership brings out the imperatives and identifies the summary actions that we need from the key actors.”
Santhosh Jayaram, Partner and Head – Climate Change and Sustainability, KPMG in India feels “Climate Change risks is now evolving as a barrier to competitiveness. Whether it is the country or business, the price of carbon will have to be internalized and is no longer an externality. The publication brings out the fact that the race to net-zero has started and it dwells into potential technological roadmaps in the journey. It concludes with the emphasis that all actors have a role to play in achieving the outcome.”
Discussing about the report, Anvesha Thakker Global Co-Head: Climate Change & Decarbonisation, KPMG IMPACT, Executive Director: Power & Utilities: Strategy and Transformation, KPMG in India said, “Net Zero pathways will require businesses to consider both demand side as well as supply side measures. In this journey, decarbonisation technologies such as renewable energy , demand electrification, CCUS, hydrogen, Biofuels may compete but will also complement with the right eco system enablers. Businesses will need to manage this interplay while considering the alignment of their investment horizons with the maturity curves of various technologies and may also need to hedge their bets across the technological spectrum. Government has to facilitate this journey through the right policy and fiscal measures.”
Key highlights from the report:
- The transition to a sustainable future, characterised by “Net Zero” is inevitable and beginning to reverberate both upstream as well as downstream owing to globally integrated supply chains
- Large global corporations have started to urge their suppliers to reduce their carbon footprint as part of their own decarbonisation strategy, which is likely to result in a domino impact on smaller nations and companies
- Harder to abate sectors are also taking bolder steps to tackle the climate agenda
- More private sector commitments are coming in and sectoral decarbonisation discussions are picking up
- Decarbonisation technologies are fast gaining ground. Sector specific measures on the demand side and energy efficiency will continue to see impact and largely align with investment and retrofit cycles. CCUS (Carbon capture, utilisation and storage) and hydrogen will co-exist to play a key balancing role in hard to decarbonise sectors with impact felt post 2030
- Electrification of end use sectors such as transport and industries will need to be supported by massive adoption of RE and its integration will require both batteries and hydrogen to come in based on application required (ranging from frequency response, to seasonal storage)
- CCUS will find a strong focus in decarbonisation of industrial sectors especially hard to abate sectors for capture of emissions and deployment in blue hydrogen production
- Green hydrogen may cannibalise some of the growth of CCUS but may co-exist as hydrogen will not be able to cater to all industrial processes
- Government, financiers, industry, consumers will need to act together to make the transition happen
- The eco-system comprising of policy, technology, market, investments, standards and society has to work together in a complementary manner in this transition journey
- The option of cross-boundary collaborations and market mechanisms will have to be evolved even in the current geo-political dynamics as world trade is still dispersed around the globe
- Universally acceptable standards to measure and navigate the journey are important to ensure transparency and accountability. Standards also will help in benchmarking and monitoring of progress
- Corporates need to assess the full impact of climate risk including physical as well as transitional risk and make implementable strategies to move towards Net Zero
- Businesses are increasingly acknowledging that decarbonisation may entail a fundamental transformation in business portfolio
- Corporates are looking to decarbonise not only their businesses but their wider supply chain
- Harder to abate sectors are also taking bolder steps to tackle the climate agenda – The biggest hurdles in achieving meaningful decarbonisation may yet be faced by harder-to-abate industries such steel, cement, aviation, shipping, etc.
Learnings from the decarbonisation journeys – This indicate that the transition to Net Zero will require a significant transformation across the organisation with massive reallocation of capital which is likely to create unprecedented challenges.
- Vision and targets: Businesses need to appreciate the deep financial impact of climate risks and make climate change their pressing agenda with clear vision and targets
- Business portfolio diversification will need to be a key part of business strategy, especially in the energy sector where a substantial part of the emissions comes from the use of the products
- Supply chain: Companies need to look beyond their emissions to the wider supply chain. It is imperative that companies work with stakeholders across its value chain to incentivize them to introduce green interventions at every step
- Technology: Businesses will need to evaluate and plan their technological pathways to decarbonisation. As the digital revolution catches up with the sector, boundaries will blur with new areas of competition. Businesses will have no choice but to anticipate and plan for a change in their business models.
- Structure: There have to be radically altered organisational arrangements that align to the business imperatives arising from climate change and the need for a deep focus on innovation and agility
- ESG: ESG is no longer a matter of mere compliance. ESG has taken a centerstage in the energy transition/ decarbonisation process and a critical link between financing and ESG that has emerged
The pathways to decarbonisation will require consideration of technologies that may complement and at times compete
- The four dominant clean energy technology pathways
- Electrification of end use sectors
- Carbon capture, utilisation and storage (CCUS) will be a crucial enabler for achieving Net Zero – CCUS is a critical technology for decarbonising hard to abate sectors (for instance, steel, cement) and is one of the few technologies that can abate emissions from fossil fuel-based power generation – While renewable energy adoption is planned in a big way, it may not completely usurp the stranglehold of coal and gas-based power plants for many decades
- Hydrogen is expected to play a key role as an energy vector in the on-going energy transition – Green hydrogen will help decarbonise hard to decarbonize energy consuming sectors such as transport and industries through sector coupling
- Bioenergy: Use of biofuels in transport applications is expected to show the strongest growth and is expected to play an important role in decarbonisation of some hard to abate sectors such as shipping, aviation, heavy transport. Technologies for generating biofuels from industrial waste have been generating significant interest and these transcend the limitation of availability of organic biomass
- Companies need to select and back R&D efforts required for bringing technologies to market based on investment cycles
Key priorities
- Identify your strategy and portfolio of technologies to meet ‘Net Zero’ target in your areas of operations
- Align your investment horizons with evolving technology types. Plan for high gestation period for technological maturity
- Integrated approach through multiplicity of bets could be important owing to inherent high risks
- Governments need to steer this change by focusing on risk alleviation through policy reforms and stable fiscal, monetary stimulus and facilitating financing
KPMG in India recommendations
- Investors and government
- Enhance investment into R&D and commercial deployment of decarbonisation technologies for harder-to-abate sectors
- Create financing mechanisms for an inclusive transition
- Companies
- Identify portfolio of technologies to meet your Net Zero target in your areas of operations
- Create conducive environment for deep tech R&D and innovation
- Customers and Consumer Standard setting bodies
- Make voluntary “green procurement” commitments of e.g. industrial components, building materials, trucks, etc.
- Evolve standards that can help in benchmarking and decision making
- Government
- Provide commercial safeguards to responsible businesses
- Focus on material changes that are required
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