Risk sharing required to accelerate energy transition

Blog series on Bridging the energy transition gaps |
#3 Renewable energy and resources

The European Green Deal and regulations such as the Climate Act and CSRD are intended to accelerate the energy transition. The goal is to achieve worldwide climate neutrality by 2050. However, to achieve this, several major gaps that still need to be bridged, particularly on the production side of sustainable energy. Increasing renewable energy and changing the way we use our energy sources cannot be done without risks. Taking and sharing those risks is necessary to bring about the acceleration of the energy transition, according to PwC energy experts Esther van der Vleuten and Peter van Asperen.

There are many positive developments to report in the field of renewable energy production. For example, there are increasingly more hubs where energy is produced and used on a small scale, ensuring that supply and demand are aligned as effectively as possible. Europe is actively contributing to this, with initiatives such as a strategic raw materials policy and the ambition to accelerate the construction of zero-emission locations with no CO2 emissions.

The CBAM (Cross Border Adjustment Mechanism) also helps to create a level playing field by preventing the import of 'dirtier' cheap products from hindering European innovation. Furthermore, there are project-based collaborations, such as the European Battery Alliance (EBA), which consists of scientific institutions and companies that collectively focus on the battery value chain.

The supply and demand for hydrogen are not in balance yet 

There are plenty of good initiatives on a small scale. If we zoom out slightly, we could halve Dutch CO₂ emissions by replacing coal use with hydrogen, especially in heavy industry. So why isn't this happening yet? The issue is that there is no profitable business case for individual parties yet. Companies that want to produce hydrogen need committed buyers, but these potential buyers only make the investment decision when there is enough hydrogen available at a reasonable price. The price in the current, imperfect balance is still (much) too high. Investing in hydrogen now carries a high risk, and many parties are not willing to take that risk.

 The necessity of a central driver of innovation 

A central driver for innovation can provide a solution. The EU and Dutch politics play a major role in this. The government could take on risks with public financing for example. Think of a guarantee instrument to cover the credit risk of the first major customer of the hydrogen producer. Speeding up the processing of permit applications for solar or wind parks can also help. This is one of the European routes to make new sustainable energy sources available faster. This speed may mean that a government needs to weigh certain interests less heavily. The right of residents not to live next to a solar park may then be subordinate.

A business case for the entire value chain

The collaboration of market operators can also be part of the solution. Producers, suppliers, and customers who share risks and results together can enable the business case for the entire value chain. This way, applications for subsidies and financing can be supported by a wider group, and the price can decrease due to the availability of offered and requested volumes. Such a feasible business case can set the flywheel effect in motion.

Consortia and public-private partnerships

The importance of collaboration for hydrogen also applies to the transition to sustainable energy in general. Consortia of governments and companies from the entire value chain can jointly build business cases. What could this look like in practice? Take a producer of heat from waste, who has a lot of experience with permit processes and the deployment and densification of heat networks. In the same province, there is a large factory that produces a lot of (unutilized) waste heat at high temperatures. A (semi)government can take on a coordinating role here and finance the risks of interrupting the heat supply - for example, if the factory has an unplanned shutdown and the heat network needs to be temporarily filled with a bio-energy plant.

If these parties jointly create a plan, it may be possible to provide all homes within a thirty-kilometer radius of the factory with waste heat. From a sustainability perspective, this is obviously desirable. These projects are also opportunities for (corporate) pension funds to invest in. The projects offer a consistent return on investment in the long term.

Wanted: technical personnel

However, such projects are difficult to get off the ground. There can be various causes. One important bottleneck is the chronic shortage of technical personnel. Technical expertise is needed to get the projects off the ground, and it is not always available. As a result, the projects can be delayed. Parties need to work together to find a solution to this issue. This could mean focusing more on technical education for young people or retraining. The technical sector needs to demonstrate what it has to offer. The government, together with companies, needs to identify the technical training needs and work with schools to address them. 

Properly managing what we have

In addition to scaling up the generation of renewable energy, energy conservation is equally important. What is not consumed does not need to be renewed. In the winter of 2022-2023, it became clear that it is actually possible: the energy price skyrocketed and suddenly we were able to halve our consumption (of gas and electricity). A (significant) price incentive proved effective in achieving innovation and behavioral change. The increase in energy use after the disappearance of that incentive proves this just as well. The crisis has shown that energy management is a critical process within many companies. Anticipating this (not only in times of energy crisis) by focusing on where energy savings are possible and investing in (own) sustainable generation leads to higher margins in good energy times and to controlled energy management for the benefit of business processes in bad energy times. 

Sharing results and risks

All positive initiatives show that there is no shortage of good ideas and ambition. To accelerate the energy transition, it is important to provide space to all those ideas and ambitions by further developing collaboration between market operators and governments. If parties step out of their comfort zone and share both the results and risks of innovation, the energy transition can gain the necessary speed.