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HSBC Transition Pathways: Unlocking the energy pathway
23 Plays2 years ago
In our new mini-series ‘Transition Pathways’, we’ll be having conversations about some of the most carbon intensive industries. We’ll explore how they’re moving forward on the path to net zero and examining some of the macro drivers, demands and innovation influencing their strategies. In our first episode, we discuss the survey findings from 300 global energy companies which reveal how they are making the transition to a more sustainable future, with HSBC’s Group Head of Climate Transition, Seb Henbest.
If you would like to explore more of the findings discussed in this episode or further insights relating to Transition Pathways visit our website.
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Transcript
Introduction to HSBC Global Viewpoint Podcast
00:00:02
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
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Make sure you're subscribed to stay up to date with new episodes.
00:00:16
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Thanks for listening.
00:00:17
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And now onto today's show.
Collaboration on Net Zero Journey
00:00:23
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Thank you all for joining us today.
00:00:24
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My name is Adam Harper and I'm the Managing Director of Ashbury Communications.
00:00:29
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We are delighted to be working with HSBC on a series of conversations looking at the net zero journey for some of the most complex carbon intensive industries.
00:00:37
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Today's conversation is all about energy.
COP27 and Energy Transition Financing
00:00:40
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November the 15th is Energy Day at the United Nations Climate Change Conference, COP27, in Sharm el-Sheikh, Egypt.
00:00:46
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And it hardly needs saying that energy is very much front and center of the global agenda.
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And at this year's COP27 climate conference, there is a strong focus on the financing and enabling environment that will be needed to translate energy transition promises into action.
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With this focus in mind, HSBC surveyed 300 energy companies from around the world to understand how they are approaching the energy transition.
00:01:11
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We wanted to find out more about what is driving them forward and what is holding them back.
Supporting Net Zero Transition for Clients
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To discuss some of the key findings from this survey, I'm delighted to be joined by Seb Henbest, who is the Group Head of Climate Transition at HSBC.
00:01:24
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Seb joined HSBC earlier this year after 14 years at Bloomberg NEF, most recently as Chief Economist.
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In this role, he oversaw the firm's Energy Economics Group and Transition Scenario Analysis.
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He was also the lead author of BNEF's flagship publication, The New Energy Outlook.
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His in-depth knowledge of the energy transition has made him a trusted advisor to governments and businesses.
00:01:46
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I'm looking forward to hearing his take on the transition pathways for the energy sector.
00:01:51
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Welcome, Seb.
00:01:52
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Thanks, Adam.
00:01:52
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So, Seb, could you explain a little bit more about your role at HSBC today?
00:01:56
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Sure.
00:01:57
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My role at HSBC is to support the bank in its transition to net zero.
00:02:03
Speaker
And specifically, it's about
00:02:06
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how the bank's customers go on their journey.
00:02:09
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Because of course, for a bank, all its emissions exposure are its scope three emissions, the emissions of its supply chain and the emissions of the customers that it has.
00:02:20
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So we're going through customer by customer, looking at their plans and trying to understand where they're going and how the bank can support that transition.
00:02:30
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And if we can support our customers, we are doing our bit and also doing good business
00:02:36
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in the process.
00:02:37
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And that's really the core of what I do at HSBC.
00:02:40
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Thank you.
Energy Security and Renewables as Solutions
00:02:41
Speaker
I believe you're currently in the Middle East and on your way to COP27 in Egypt.
00:02:45
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How much focus do you think there's going to be on decarbonizing the energy sector at that event, especially given the concerns we have at the moment about energy security?
00:02:52
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I think energy security is an issue that had been dormant for a number of years and has come sort of racing back into the public consciousness with the events in Ukraine at present.
00:03:05
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There was a lot of concern, I think, from a climate perspective that this would be a significant distraction on global efforts to reduce emissions.
00:03:15
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It certainly put the balance between energy access, energy reliability and decarbonisation into sharper focus.
00:03:24
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But the conclusion that is generally being drawn by most people that I speak to is that these things are not mutually exclusive and that
00:03:35
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the transition to low carbon energy is a form of energy security because particularly around renewables, this is homegrown energy.
00:03:45
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It's energy that can be built and put on the ground rapidly, much, much faster than conventional thermal power stations can.
00:03:53
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And as a result, actually can do a lot to alleviate the current situation, even as we have to make some near-term choices to ensure energy security over the next year
00:04:04
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to hopefully not much longer than that.
00:04:08
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But I think that the end result here is that energy security and energy supply is supported by a shift to renewables rather than it upend the transition that we are currently undergoing.
00:04:25
Speaker
Yeah, and that comes through in the survey that we've just conducted, as you know.
00:04:30
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One of the data that jumps out straight away is most energy companies are saying that energy security considerations are actually accelerating their transition.
00:04:39
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We had 52% of respondents saying energy security is speeding up their net zero progress, and only 13% saying it's holding them back.
00:04:47
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And that's quite a striking finding that supports what you were just saying.
00:04:51
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But what do you make of that?
00:04:52
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Were you surprised by
00:04:54
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what a large proportion of energy companies actually do see energy security as an enabler for more investment in renewables.
00:05:02
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Yeah, I think when you think about what the energy crisis currently is, it's an imbalance of supply and demand.
00:05:09
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We've got a rerouting of energy on the supply side that isn't balanced with where demand is as a result of Russia's invasion of Ukraine.
00:05:21
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And these imbalances are creating price signals to rectify that situation.
Market Response to High Prices and Renewables
00:05:28
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So in many ways, high prices are the result of the market responding to that supply-demand imbalance.
00:05:33
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And in some ways, as they say, high prices are the solution for high prices and that there is some demand destruction that goes along with that.
00:05:43
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And in terms of being able to manage this situation, I think there is a certain amount of
00:05:51
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doing the same with less on an energy front, which is an energy efficiency of sorts.
00:05:57
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I think statistics from the market suggest that there's a reasonable amount of demand response from the market.
00:06:05
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I think September in Europe, demand was down about a bit over 4% from the most recent historical averages, which does suggest that we're getting some response on the demand side.
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But on the supply side, you're also seeing that
00:06:20
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the markets respond and high prices start to really make the case for some low carbon energy that may have otherwise been more marginal in certain parts of the world.
00:06:31
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And you can build renewables really fast.
00:06:34
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One to two years for large PV plants, large wind farms.
00:06:40
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And that's certainly a really good near term response to high prices.
00:06:44
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And, you know, we're going to see a record amount of renewables built worldwide in 2022.
00:06:51
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partly in response to those high prices.
00:06:53
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So I think, yes, there is hardship associated with high prices, but it is a driver of change.
00:07:00
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And in this case, it is going to drive some more faster near-term change into renewables at the same time as there is some operational shift towards coal.
00:07:12
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We know that.
00:07:13
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But that's not structural.
00:07:15
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And I think that's a really important differentiator.
00:07:17
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We're not seeing big structural changes back to fossil fuels.
00:07:20
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The economics just don't make sense.
00:07:22
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The risk of stranding is too high.
00:07:23
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Reputational issues are too high.
00:07:26
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And overall, I'm not surprised by the result of the survey, but it's a really strong reminder that renewables and the move to zero carbon and energy security are very, very closely aligned.
00:07:39
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Yeah, we also saw a strong relationship here between the transition and growth for the respondents that we had in this survey.
00:07:48
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95% of energy companies that we spoke to said that transitioning to net zero is important to the business growth.
00:07:54
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That's very high.
00:07:55
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And it suggests that there's pretty strong consensus out there about the business case for change.
00:08:00
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How much does that align with your experience?
00:08:02
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And what do you think it tells us about thinking in the industry right now?
00:08:06
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I think it tells me that
00:08:08
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net zero is an idea that time has certainly come.
00:08:13
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I'm not surprised at all, but it is now becoming a central part of business strategy and how companies look at their future growth trajectories.
00:08:24
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I mean, there's about roughly 90% of world emissions are now covered by a government net zero target, or there is a target in discussion.
00:08:35
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It's part of the political consciousness
00:08:38
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That's 90% of emissions, so that's getting close to almost everyone everywhere.
00:08:42
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And I think from a company perspective, I think the statistic I saw was about a third of the largest companies, publicly traded companies out there in the world now have net zero targets.
00:08:53
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So the combination of government and large players in the world economy all pushing in this direction
00:09:01
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gives it a certain inevitability that this is the way in which the economy is going to evolve.
00:09:05
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Now, will it go fast enough to avoid the most dangerous climate change that we talk about?
00:09:12
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Will we keep within one and a half degrees?
00:09:14
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Really difficult, open questions.
00:09:16
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But certainly the push towards decarbonisation is evident everywhere.
00:09:20
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And if you're not getting on that bandwagon, if you're not starting to pivot your business in this direction, there's a real risk of being left behind.
00:09:27
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And I think that's what the survey results are.
00:09:30
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are pointing towards.
00:09:31
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Yeah.
00:09:32
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And if we turn to look at some of the enablers of that transition for energy companies, technology featured very strongly in the survey as a catalyst for speeding up the transition.
Role of Technology in Net Zero Transition
00:09:45
Speaker
To what extent are the kind of technologies that energy companies need for their transition already available and how affordable are they?
00:09:51
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Well, the
00:09:53
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The transition to net zero is a technology transition.
00:09:56
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We don't get there by all tightening our belts and doing a little bit less.
00:09:59
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That could help.
00:10:01
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But at the end of the day, we need to provide the utility in the world economy through low and zero carbon means.
00:10:08
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And that means the way we move things around to the transport sector.
00:10:12
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That means the way we make things in industry and manufacturing, the way we use energy to manage climate, local climate in buildings and buildings.
00:10:23
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put the heating on in winter and the air conditioning on in summer, all those use cases need to be done with zero carbon.
00:10:29
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And that requires some technology change.
00:10:33
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And so it's not surprising to me at all that technology is central to this.
00:10:40
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And if you think about the technology space, you can break it into two pieces.
00:10:45
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You can look at the, what I call phase one decarbonization, the things you can deploy today,
00:10:51
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that you can kind of buy off the shelf.
00:10:53
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They may not always be the most cost competitive option, but often they are.
00:10:59
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But then you've also got this phase two of technologies.
00:11:02
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And these phase two are the things that aren't yet really economic or at scale that are much more in pilot phase that include things like hydrogen, carbon capture and storage, other sort of synthetic fuels, materials,
00:11:19
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You can think about these as the technologies that need a lot of development, new business models, new manufacturing to get from where they are now to where they need to be by 2030, say, such that they can play a big role over the subsequent 20 years to 2050 to achieve success.
00:11:40
Speaker
objectives.
00:11:41
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Let's look a bit more closely at oil and gas specifically.
00:11:45
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We saw that 88% of companies who responded to the survey said they had a dedicated reporting plan in place for their transition targets.
00:11:53
Speaker
But only quite a small percentage of those are reporting on the full range of scope one, two and three emissions.
Challenges in Setting Emissions Targets
00:11:59
Speaker
What do you make of that?
00:12:00
Speaker
What do you think the hurdles are at the moment for companies in the oil and gas sector when it comes to setting emissions targets and reporting against them?
00:12:08
Speaker
Well, first, let me say that targets are really, really important.
00:12:12
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And the saying goes, if you can't measure it, you can't manage it.
00:12:16
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And it's, of course, exactly true.
00:12:19
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And that means that the first thing that companies need to do is know where they stand.
00:12:23
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They need to know what their current emissions profile looks like.
00:12:28
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For oil and gas companies, the bulk of their emissions are scope three.
00:12:31
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It's the use of the oil or the gas downstream from the exploration and production.
00:12:38
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And that means that these are emissions that aren't in their direct control, but also there's a wide variety of use cases for these fuels.
00:12:47
Speaker
And so it's quite challenging to get on top of exactly what the emissions footprint of all those lines of activity that a large, say, oil and gas company might be active in.
00:13:01
Speaker
And that's one of the main reasons why we see less Scope 3 emissions targets
00:13:08
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and scope three baselines being set in oil and gas than we do scope one or two, which is in their direct control.
00:13:17
Speaker
But really, it's a really critical step that that exercise is done because at the end of the day, it's very hard to set a plan that can attack the bulk of emissions from your company, whatever your company does.
00:13:33
Speaker
If you don't know where the bulk of those emissions come from, how they come to be, and therefore the sort of technology change, business change, process change, you would need to implement in order to reduce them over time in a way that's consistent with these long-term goals.
00:13:47
Speaker
So this is a challenge for companies.
00:13:50
Speaker
There's lots of third-party providers who do this for a living now, so the space is a lot easier to navigate than it was, but certainly this is an additional exercise that
00:14:03
Speaker
more and more companies are doing, but there are still some who haven't quite got there yet.
00:14:06
Speaker
But I anticipate there will be these emissions measured and calculated for the majority of major companies in the world over the next year or so.
00:14:15
Speaker
I think it's all coming thick and fast.
00:14:17
Speaker
You talk there about the importance of target setting for oil and gas companies.
00:14:22
Speaker
What more should there be in a credible transition plan for an oil and gas company?
00:14:27
Speaker
Well, certainly knowing your emissions, setting some targets are the foundation steps.
00:14:32
Speaker
I think that
00:14:34
Speaker
The next most difficult thing really is to try and imagine what your company needs to be doing in the future to ride this transition optimally.
00:14:45
Speaker
In other words, how do you change your business over time that is consistent with net zero ambition but does so in a way that's orderly and managed?
00:14:56
Speaker
And for that, you need a plan.
00:14:58
Speaker
So we think about this assessing the
00:15:04
Speaker
where a company is based around the sort of plan that it puts together.
00:15:09
Speaker
And really what's critical in this plan is two things.
00:15:14
Speaker
One is that the actions really line up with the legacy business.
00:15:19
Speaker
Like what are you changing in those legacy business lines?
00:15:22
Speaker
How are you actually going to evolve those legacy business lines?
00:15:26
Speaker
What are the new business lines that may evolve?
00:15:29
Speaker
And probably...
00:15:30
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where the rubber hits the road here is, are you spending money on making that change?
00:15:34
Speaker
So knowing the capex as a fraction of total capex is a really important metric.
00:15:39
Speaker
It tells us that it's fundamental about how serious a company is.
00:15:43
Speaker
So I think transition plans need to be structured around the existing business lines, an ad hoc set of activities, but things that are really can be mapped against, quantified against existing businesses to be able to see that transition and that reduction in emissions.
00:15:59
Speaker
And they need to be funded.
00:16:00
Speaker
I think if those two things are in place, then we can look at that as a bank and go, this company is on the right track.
00:16:09
Speaker
And there's lots of different pathways.
00:16:11
Speaker
There's lots of different technology options.
00:16:13
Speaker
There's lots of different rates of change that may be on track.
00:16:16
Speaker
But
00:16:17
Speaker
It all starts with a plan.
Balancing Renewables Deployment and Demand
00:16:19
Speaker
So moving on to electricity generation, the survey showed that renewables are definitely the biggest target of current CapEx investments.
00:16:26
Speaker
And that's a very clear consensus that has emerged.
00:16:29
Speaker
How do you think companies in the power sector are adapting to the transition?
00:16:34
Speaker
I think the power sector is really building renewables sort of hand over fist.
00:16:39
Speaker
There is a huge amount of deployment going on at the same time as
00:16:46
Speaker
there is a managed phase-out of unabated coal.
00:16:50
Speaker
And so what we're seeing across the power and utility space is a lot of renewables built.
00:16:55
Speaker
That can include batteries as well.
00:16:57
Speaker
The use case for batteries, of course, is broad because batteries can do a lot of different things in a power system and can be very economic if you can layer up revenue streams from lots of different services they provide.
00:17:11
Speaker
But batteries and renewables being deployed at pace and at scale
00:17:17
Speaker
as the coal-fired power in particular is retired, there is probably a role for gas to help ensure security of supply over the medium term.
00:17:29
Speaker
So there's less sophisticated plans, I think, from power sector companies on how they're going to manage gas, especially if they also distribute gas to households and businesses for building energy, whether that's for cooking or for heating, et cetera.
00:17:46
Speaker
But overall, the utilities that I look at are, you know, renewables are in their line of sight and they have generally pretty ambitious rollout plans.
00:17:56
Speaker
Is it fast enough?
00:17:58
Speaker
No.
00:17:59
Speaker
Partly because we're asking the power sector to do so much in the transition.
00:18:03
Speaker
We're looking to electrify transport, electrify heating.
00:18:08
Speaker
At the same time, that then takes a whole bunch of energy use from what was fossil fuels,
00:18:15
Speaker
in other sectors and piles into the power sector.
00:18:17
Speaker
So they've got to decarbonise the power sector as demand grows very rapidly over the next decade or two.
00:18:24
Speaker
And that's a real, real challenge, actually.
00:18:27
Speaker
So not fast enough, but certainly the renewables are really, you know, are, as I said before, cost-effective and economic and are really the main game in town.
00:18:37
Speaker
And if you think about clean electricity,
00:18:41
Speaker
It forms the bulk of emissions reductions across the world economy that we might expect this decade.
00:18:48
Speaker
And that is only going to be driven by the power sector building more and building faster.
00:18:53
Speaker
And for that to happen, governments have really got to get behind them, provide the right price signals, lower the barriers, regulatory barriers to entry.
00:19:03
Speaker
And then I think, you know, we could get ourselves on track this decade if the power sector does all that heavy lifting.
Barriers to Energy Transition
00:19:12
Speaker
When we looked at the survey results, Seb, we found respondents told us that costs and financing are the biggest hurdles.
00:19:21
Speaker
How do we overcome those hurdles?
00:19:23
Speaker
It's a really great question, because on one hand, sort of projects that are available, say in the renewable space right now, wind and PV, you've got way more capital than there are projects to deliver it to.
00:19:38
Speaker
And so you've got really tight margins.
00:19:40
Speaker
It's quite a
00:19:41
Speaker
unprofitable thing to be involved in.
00:19:43
Speaker
But on the other hand, you've got so much deployment that you need and into new technologies that don't have those markets yet that, you know, cost of new technologies and financing them, getting them from early stage to economic, commercially viable, deployable phases in their development, I think is really what the survey is pointing towards.
00:20:05
Speaker
It's not talking about a lack of finance of wind farms, particularly, though there may be some cases where
00:20:11
Speaker
particular projects are struggling.
00:20:13
Speaker
Most of this, I think, is pointed towards sort of the next phase of technologies.
00:20:17
Speaker
The technologies, particularly for say oil and gas companies who specialize in molecules, if we want clean molecules in the future, we're quite a long way still from that being commercial reality, whether that's hydrogen or biogas or other sorts of synthetic fuels, sustainable aviation fuel.
00:20:36
Speaker
These things are all far out of the money at the moment and need a lot of financing and scaling
00:20:41
Speaker
But that's a different market altogether to the wind and PV side of things.
00:20:47
Speaker
So you've got very different finance needs.
00:20:52
Speaker
On one hand, you've got to scale the projects and scale the finance or project delivery.
00:20:58
Speaker
On the other hand, you've got to scale sort of nascent technologies from pilot phase through to commercial scale.
00:21:05
Speaker
And there's valleys of death there where conventional finance struggles to play a role.
00:21:11
Speaker
where equity finance is going to be needed to bridge that gap.
00:21:16
Speaker
Maybe banks can play a role in there as well.
00:21:19
Speaker
But that is a really, really important gap to fill.
00:21:22
Speaker
And the governments are really critical.
00:21:24
Speaker
And if you think about how did wind and PV, as the most mature part of the energy transition, get to where they are now, they got to where they are now being cost competitive because governments created a huge amount of demand side pull.
00:21:37
Speaker
And that helped to bridge across the valleys of death that occur between sort of early stage technology and full commercial scale.
00:21:46
Speaker
And that's got to be needed here for these newer technologies, these phase two technologies, the hydrogen, the carbon capture and storage, next generation nuclear.
00:21:56
Speaker
There's a whole long list of technologies.
00:21:58
Speaker
And I think that's what the survey is really pointing towards for me.
00:22:01
Speaker
How do we scale up and provide finance for and bring the cost down?
00:22:05
Speaker
for those necessary sort of second phase
Future Commitment to Net Zero
00:22:08
Speaker
technologies.
00:22:08
Speaker
When we come to do the survey again in a year's time, what kind of changes would you expect to see?
00:22:14
Speaker
I mean, I think the survey is going to tell us that the direction of travel has just got stronger.
00:22:19
Speaker
I'm going to expect to see that some of these financing challenges and the technology cost challenges haven't gone away.
00:22:27
Speaker
We haven't magically solved them in 12 months, but that more and more companies are putting...
00:22:33
Speaker
transition to net zero and decarbonisation as key parts of their business strategy.
00:22:40
Speaker
And that's playing out across the world, not just in, say, Western Europe or North America, but we're seeing that as we already are in the survey, but seeing that in Asia, seeing that in the Middle East.
00:22:50
Speaker
And I think those percentages of firms that are making this a very important part of their business is going to get bigger and bigger.
00:22:59
Speaker
I don't think we're going to regress.
00:23:01
Speaker
in a year's time, this is going to become less important.
00:23:04
Speaker
I think it's only going in one direction.
00:23:07
Speaker
The core results of this survey, I think, are a really strong signpost for where we're at.
00:23:12
Speaker
And in a year's time, it's just going to get more and more clear that this is where future business needs to be done.
00:23:19
Speaker
This is where future profits are going to be made.
00:23:21
Speaker
It's a difficult road between now and the future.
00:23:24
Speaker
And that's, you know, there are fortunes to be won and lost.
00:23:26
Speaker
This is a business opportunity as well as a risk to be mitigated
00:23:31
Speaker
And the more firms we see looking at it as an opportunity, I think, the more likely we are to be able to move at pace.
00:23:39
Speaker
Thank you all for joining us today.
00:23:40
Speaker
It's great to have you with us.
Closing Remarks and Call to Action
00:23:42
Speaker
If you'd like to find out more about the research that Seb and I were discussing, please click the link in the description.
00:23:48
Speaker
Seb, thank you very much for joining us today.
00:23:50
Speaker
Thanks, Adam.
00:23:50
Speaker
Pleasure.
00:23:56
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:23:59
Speaker
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