September 2008
As discussions about climate change grow more and more intense with no clear answers about how to proceed, companies in the resources industry find themselves in an especially difficult position. Today, energy production and use account for the bulk of man-made greenhouse gas emissions viewed by some as the primary contributor to climate change.
The power industry alone is responsible for about a quarter of the man-made carbon dioxide released into the atmosphere. And the carbon footprint of the rest of the resources industry—which for the purposes of this article includes chemicals, metals, mining and forest products companies, as well as utilities and energy businesses—is large enough to place it squarely in the crosshairs as regulators ruminate over carbon emissions policies and targets.
No wonder an overwhelming majority of resources industry executives who responded to a recent Accenture global survey (see "What industry executives think," below) recognize that they will need to develop appropriate strategies to achieve high performance in the low-carbon economy—a standard that will be demanded by regulators, investors, customers and employees. Yet because of the uncertainty of what the policies and targets will be, it is a daunting task to figure out which strategies to implement.
Fully three-quarters of respondents take the view that policy makers need to create the conditions that would make rising meaningfully to the challenge of climate change worth the business risk. After all, they reason, by investing in capital projects and new innovations, products and services without a globally agreed-upon policy framework on climate change, they could turn out to be the losers financially, and hence also lose out on the chance to contribute to the solution.
These caveats are understandable. But waiting for policy makers may be just as risky as taking action. Accenture’s experience suggests that by failing to act, the resources industry could be missing significant business opportunities.
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Some leading resources companies have shown a way forward that doesn’t involve making speculative bets on future policy. By actively managing four main drivers of business success around climate change, these companies are actually building the distinct competitive advantages that contribute to high performance.
Policy development
In most countries, climate-change policy is in its early stages of development—and even in those where a framework appears relatively advanced, uncertainties persist because of the lack of a binding global agreement on a larger, long-term solution.
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Where there is more clarity, however—notably, in the European Union, which operates the world’s largest multicountry, multisector greenhouse gas emissions trading scheme (see sidebar, below)—the industry has been better able to take the initiative. But even in this case, the policy solution is still evolving and incomplete, which adds different kinds of uncertainty. For example, many believe that not enough policy tools have been implemented to support technology innovation. Placing a cost on carbon via a trading scheme or a tax scheme without also making a compelling case for technology innovation is only part of the answer.
It is obviously vital for companies to stay close to policy making as it evolves. Existing policies in other countries can provide good indications of the winners and losers under different approaches, so it’s important to understand them.
But effective engagement with government is probably even more important. And companies should join together on a global level to make their views known on such key issues as the amount of potential emissions reductions achievable, the timing of those reductions, the costs to deliver them, the implications for industrial competitiveness and the policy tools that have the best shot of leading toward a low-carbon economy.
Above all, the resources industry needs to push for assurances that policy makers won’t use climate-change initiatives for short-term political gain. If policies aren’t credible, there’s a risk of failing to meet targets—and that will hamper future reduction efforts. What’s critical is not only a clear direction on policy but also an approach that lets all players know how policy changes will be reassessed as circumstances change. Resources companies should focus on moving toward that goal.
Customer attitudes
While there is cause for skepticism about customers’ willingness to shoulder the added costs of low-carbon solutions, it is important to recognize that public attitudes about climate change have evolved very rapidly over the past two years.
Whether for personal ethical reasons or for market-positioning purposes, some customer segments, both commercial and consumer, are willing to pay up for lower-carbon solutions such as zero-emission buildings, hybrid vehicles and smart meters. Some resources companies have been swift to leverage this burgeoning demand, tapping new revenue sources and boosting their brand value with customers in the process.
In September 2001, French-owned EDF Energy, for example, whose power stations supply electricity to one-fifth of the UK population, introduced the Green Tariff program, which is designed to support more renewable-energy sources. Customers who opt to pay the Green Tariff are contributing to a Green Energy Fund for renewable-energy projects in local communities in the United Kingdom—solar panels for schools, for example. In California, Pacific Gas and Electric Company has launched a similar program, which has also given the utility invaluable insights into its customer base (see sidebar below).
Technical Innovation
Our survey respondents cited policy support for new technology innovation as a critical component of the solution to climate change—and some have started to focus their R&D and innovation capabilities on driving low-carbon and alternative-energy solutions. Companies that recognize the climate-change agenda as the driver of the next massive wave of innovation, and that figure out how to be in the game with their own innovations, will come out on top.
Two major oil companies are vying for bragging rights to building the biggest wind farm in the world; both projects are under way in the Texas Panhandle. And Xcel Energy, a Minneapolis-based utility, plans to combine traditional and new technology to build the “smart grid city of the future” (see sidebar below).
There are so many promising new technologies under development that companies will clearly have to place some bets.
A case in point: The executives surveyed voice high hopes about the potential of a still-maturing technology: carbon capture and sequestration (or storage), particularly for the utilities, oil, chemicals and metals industries. The process, which captures carbon dioxide and transports it to suitable long-term-storage locations (deep underground, for instance), could be an effective way of dealing with future carbon emissions. But along with the innovation and investment decisions needed to bring that technology to market, companies will have other complicated decisions to make. Utilities, for example, will have to decide whether they want new coal or gas plants retrofitted for carbon storage and, if so, which of three possible technologies—pre-combustion capture, oxyfuel combustion or post-combustion capture—will prevail.
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Choosing the wrong technology would not only be costly; it could even shorten the life of the energy plant. So companies need an exceptionally flexible R&D function, supported by an in-house capability to track and evaluate the latest technological advancements and possible paths to innovation. Companies should engage in activities ranging from periodic reviews of research papers to collaboration with universities and participation in industry technology programs. They could also take minority equity stakes in a group of potential technology startups, which would allow the company to gain a clear understanding of the competing technologies being developed.
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New business models
As interest in both demand-side and supply-side solutions such as energy-efficient technologies, smart grids, renewables and carbon-neutral buildings increases, a range of new business models is emerging. Utilities are one source of these models. Several are already offering consumers domestic electricity generation capabilities. And virtual power plants, where the output from multiple small-scale generation sites could be sold as if from a single power station, are another possible business model in some markets.
But there are also opportunities for players outside the industry. One US-based retail giant, for example, has expressed an interest in providing power to its customers much like it is looking to provide health care components. And in developing solutions, some companies are looking beyond the typical industry value chains.
Japanese utilities, for example, are working with the country’s auto industry to develop electric vehicles. And utilities in Europe and the United States are working more closely with the construction industry and urban planners to develop low-energy buildings, potentially with microgeneration capabilities that will serve the building’s energy needs and other efficiency-focused solutions built in.
These new opportunities may start small, but the payoff from leveraging them promises to be substantial. Since demand-side actions are generally believed to have the largest emissions-reduction potential in the shortest time frame and at the lowest cost, policy makers are likely to favor new types of business models that support these actions to deliver early reductions in energy demand.
The capital markets, too, are beginning to favor carbon-conscious resources companies—witness the large multiples paid for those with portfolios strong on renewable-energy solutions. There is also evidence that the growing focus on the emissions performance of buildings is being considered in valuations of property portfolios, with some financial institutions with large real estate holdings considering investing in energy-management systems and technologies to drive energy efficiency throughout those holdings.
As climate-change policies are refined and implemented in various stages around the world, companies with experience in operating and innovating in carbon-constrained circumstances will have a significant advantage. Such companies will be positioned among the leaders in achieving high performance in the low-carbon economy of the future.
About the author
David J. Abood is the executive director of the Accenture Climate Change group, which works with companies in the resources industry to help them address the business opportunities and challenges related to the evolving global position on climate change and the move toward the low-carbon economy of the future. Based in Cleveland, Ohio, Mr. Abood has 18 years’ experience leading business and technology change initiatives from strategy through solution design, planning and implementation. Mr. Abood plays a lead role in incubating several of Accenture’s new-business initiatives related to climate change, and provides counsel to a number of non-profit organizations in this area. He is also active in Accenture’s internal sustainability initiatives focused on corporate citizenship and employee engagement.
Sidebar #1:
Setting the rules of the game: The impact of Europe’s emissions trading scheme
Regulation plays a pivotal role in determining whether resources companies take meaningful action to address climate change. Witness the differing views (as revealed by Accenture’s recent global survey of resources industry executives) of companies within the European Union, where a greenhouse gas emissions trading system has been in effect since January 2005, and those based elsewhere.
While almost half of non-EU respondents cite the absence of global, long-term policy clarity as a major impediment to deciding on investments, 35 percent of EU-based companies consider it a problem. Moreover, 15 percent of EU companies surveyed have difficulty defining global climate-change policies for their business, compared with almost one-quarter of companies in other geographies.
The trading scheme imposes carbon emission limits on resources companies within the EU—but allows companies that cut their emissions to a level below the limits to sell the excess or keep it for future use. Companies that exceed their limits can invest in carbon-cutting technologies, or buy others’ excess allowances—whichever is cheaper.
Some 82 percent of EU-based executives surveyed complain about increased bureaucracy and costs associated with the scheme. But they also acknowledge that it has had a positive impact on their decisions, activities and performance in regard to climate change. Despite various challenges, the European trading system has plainly been instrumental in getting EU-based companies—more than companies in other regions of the world—to implement fundamental changes to their businesses.
One out of two EU-based resources companies surveyed say the scheme has “significantly” improved the incorporation of carbon costs into their financial and operational decision making and has enhanced the visibility of their carbon footprint, thus leading them to place greater emphasis on energy efficiency and conservation.
Indeed, these companies are significantly more focused on adding value through climate-change-related initiatives than their counterparts elsewhere—a focus that leads almost three-quarters of them to consider the greenhouse gas emissions as an integral part of all key processes.
Sidebar #2:
The greening of customers: PG&E’s ClimateSmart initiative
Leveraging their customers’ demands for cleaner energy is now a well-established trend among utilities in Europe, where a carbon emissions trading scheme has established a relatively advanced policy framework (see sidebar, opposite). The United States lacks a similar framework—but public concern about climate change has intensified there too in recent years. In a number of states, notably California, some energy providers are responding to customer demand.
Since 2007, the 15 million or so customers of San Francisco-based Pacific Gas and Electric Co., one of the largest combination natural gas and electric utilities in the United States, have been able to enroll in a voluntary program to reduce their personal impact on climate change. By paying a little extra—typically less than $5 a month for residential customers—participants in the ClimateSmart initiative can help fund greenhouse gas emissions-reduction projects throughout California. The projects, all of which enjoy the approval of the state’s public utilities commission, include two large forest conservation programs and should soon include the capture of methane—another potent greenhouse gas—from dairy farms and landfills.
PG&E, meanwhile, has been able to identify its most “green-minded” customers—among them the cities of San Francisco and San Jose, as well as thousands of individual consumers—and can thus better target low-carbon solutions as it develops them.
Sidebar #3:
Getting smart about power provision: Xcel Energy’s combination grid
Wind and solar electricity generation technologies are widely touted as potential solutions to the climate-change challenge, but most experts agree that they can’t do it alone. The key to success is to combine traditional and new technologies more effectively and efficiently—exactly the idea behind Xcel Energy’s “smart grid city of the future” in Boulder, Colorado.
The US utility, which provides power to more than 5 million consumers in eight Western and Midwestern states, is combining existing wind and solar generation technology with new smart grid technology that embeds devices in the distribution system to increase utilization of wind and solar power generation, decrease the incidence of power outages and improve customer service. The idea is to create an integrated and more energy-efficient user interface that will help the city’s residents reduce their carbon footprint by making more use of “green” technologies, especially from wind farms. Xcel aims to generate 20 percent of its power supply from environmentally friendly sources by 2020.
Changing behavior by empowering consumers is core to the smart grid concept. Boulder residents will be able to use advanced meters and in-home devices (for example, control systems, programmable thermostats, monitoring/controlling devices), capable of two-way communication, to monitor and adjust their carbon footprint and how much energy they use for different purposes. Eventually, if state utility regulators approve, Xcel could even use the meters to price electricity dynamically—charging one price for basic lighting, for example, and another for running air conditioners.
Sustainability II
What industry executives think
The findings cited below are based on a recent Accenture study that surveyed senior executives from 133 major resources companies in the utilities, energy, chemicals, forest products, metals and mining industries in 29 countries.
What is the importance of the following drivers for your company in acting to address climate change?
What are the main difficulties that prevent/would prevent your company from acting to address greenhouse gas emissions?
Have you already received strong requests from your individual customers for products and services that help reduce their carbon emissions?
If an energy provider was proposing products/services that help reduce its carbon emissions, would you be willing to switch to this provider?
Which policy approach do you think will have the greatest impact on global emissions of greenhouse gases? Please indicate a rating on a 5-point scale in which 5 means you consider this approach absolutely necessary and 1 means it will have no real impact on global emissions.
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