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PE Live: US and EU take divergent pathways to net zero

The EU is pursuing a unified approach to the energy transition, while individual US states are taking the initiative on the road to a broadly similar destination

The EU typically garners plaudits for leading the energy transition, but its headline-grabbing policies, such as the European Green Deal and net-zero commitments of its majors, mask progress being made in the US and other countries around the world, listeners to a PE Live webcast on the energy transition heard last week.

The European Green Deal is probably the “most important piece” of the EU’s energy transition and efforts to tackle climate change, according to Anne Lapierre, partner, global head of energy at law firm Norton Rose Fulbright. 

She notes that pre-pandemic policies were not in line with the Paris Agreement. “It is now the priority of Europe… Europe needs to be climate-neutral by 2050 and, in the meantime, we need higher targets for 2030 to be on track.”

The EU policy covers energy but also decarbonising transport, heating and industry, and is potentially backed by a €1tn investment schedule. “That has absolutely never been seen before,” she adds. “In terms of implementing directives and targets of transposition into member states' legislation, there is a very strong push. It really could be a game-changer.”

At the EU level, there is recognition that there should be a “fair transition” to ensure that some countries are not harder hit than others. A carbon tax at the boundaries of the EU could be used to protect the bloc’s economy from those “less willing” to bear the cost of the transition. “The plan is big. The plan is great,” she says.

Lapierre acknowledges that the crisis has hit investments in the short term, saying that “probably something like 10pc less investment than expected for 2020” has been placed into renewable energy projects. 

In addition to the European Green Deal, Europe has announced a €750bn recovery plan to create jobs by transitioning more quickly. “I am pretty optimistic about this move,” she says while noting that results will take time. “We will probably be in a position to assess the first effects of this plan by 2025.”

United States

The EU’s top-down approach stands in stark contrast to the US, where states have taken the lead in the absence of a unified federal policy. “We have wide variation across the 50 states,” says Katherine Hardin, executive director, Research Center for Energy & Industrials, at consultancy Deloitte.

“Some states are moving more quickly than others in terms of implementing renewables in the generation mix. This goes to the heart of the fact that decarbonisation of the power sector is one of the key steps in the energy transition overall. But we have seen progress, even during the downturn.”

The state of Virginia, for example, in April joined eight jurisdictions in enacting a 100pc renewable portfolio standard. “Thirty states have renewable portfolio standards, and many have increased them recently. Several others have renewable energy goals. The adoption of renewables in the power sector is not driven only by policy—increasingly, there is an economic component to it,” she says.

“We are seeing corporations signing more renewable power-purchase agreements every year. We saw a large increase from 2018 to 2019. Even in the first quarter of 2020, that trend remains strong.”

“It is not just about cheap natural gas replacing coal in the US power sector, but also about the rapidly declining costs of wind and solar power, which have made them some of the least expensive sources for power generation—and the falling costs of battery storage, which can make intermittent renewables more dispatchable.”

Another trend in the US is for power utilities to work with their customers to decarbonise, says Stanley E Porter, vice chairman, US energy, resources, & industrials leader, Deloitte. “Over 65pc of US customers are served by utility companies that have publicly stated targets, some of which are aggressive.”

Deloitte research found that the top three factors driving engagement by the power utility companies in the US are: customer support for low carbon; digital technologies, specifically around energy efficiency; and new business models, such as energy-as-a-service.

It also found that, while 32pc of EU power already comes from renewables, the US is catching up fast. “In the US, coal declined from 45pc of overall power demand in 2010 to 23pc [in 2020]. Renewables are currently at 17.5pc, but expected to move to 38pc by 2050,” he says. Transportation stands out as a “top area where utilities are engaging” as well as industrial processes and buildings.

“We are entering a phase where we are not only looking at coal-to-gas switching—but increasingly fossil fuel to renewable switching,” adds Deloitte’s Hardin. “This year we have seen that renewable energy sources have overtaken coal’s share in the generation mix each day for more than 93 days, including a stretch of 53 consecutive days. That is definitely up from 2019.”

Investment decisions 

While there are different broad governmental approaches on each side of the Atlantic, companies everywhere face the same challenge and individual companies are taking widely different strategies. 

“We certainly see a common focus on what the energy transition means, the threat to businesses,” says Allan Baker, head of energy advisory & project finance (Emea) at bank Societe Generale. “Clearly, it will have a major impact on many companies' business models.”

Many European companies have made net-zero commitments—including BP, Shell and Repsol. “The interesting thing is the 'net' piece. Clearly, there will still be a need for oil and gas. It is not going away overnight.

“We are seeing different strategies to transition more-or-less quickly from the traditional oil and gas businesses into clean energy companies. 

Renewables are part of the trend, he says, adding there is a much wider focus on clean energy and decarbonising the energy chain. “You see companies buying into renewables, sure, but you also see companies developing their hydrogen businesses and getting into mobility and charging networks… they are diversifying,” says Baker. 

He adds that not all transformations will be as extreme as that of Danish NOC Dong, which completely changed its business from oil and gas to offshore wind and renamed itself Orsted.

“That is one strategy. But a lot of people are looking at this as a longer-term transition,” he says. “It may only be a matter of time, but certainly offshore wind projects are becoming more competitive, with cost reduction becoming much, much larger.”

He notes that oil and gas companies such as Shell and Equinor are looking at 1,000MW-plus offshore wind projects, which are several-billion-dollar investments. “We have not seen US oil and gas companies taking that step, maybe because the offshore wind industry in the US is only just getting going—it will be interesting to see if they follow it. 

“Certainly, we see different strategies and approaches. But it is all driven by the realisation that business models are under threat. You need to change and adapt to survive.”

A recording of PE Live: Is the energy transition accelerating? can be heard here.

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