30/09/2021 - 15:35

The Next Frontier – Clean Energy and Decarbonisation

30/09/2021 - 15:35

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The pace of change is swift and unrelenting, racing to make up for the decades we ignored the need to address the greatest challenge humankind may ever face.” - Michael Blakiston  

Paradigm shifts come along maybe once in a generation, but this one has been brewing for much longer. Some call it the Anthropocene – an unofficial new epoch of our own making, the most recent period in our geological history when human activity started to have a significant impact on the climate and ecosystems. Our climate crisis, and the urgent need to reverse the impact of climate change, is forcing every system in every industry across the globe to transition. The pace of change is swift and unrelenting, racing to make up for the decades we ignored the need to address the greatest challenge humankind may ever face.

At the forefront of the need to abate emissions is the energy sector. Energy is fundamental to humanity, but the way we currently produce and consume it is fundamental to our future. The energy sector is the source of approximately three‐quarters of greenhouse gas emissions today and holds the key to averting the worst effects of climate change.

Societal, political and investor pressures are accelerating the shift away from fossil fuel-based energy and toward a zero-carbon economy, pushing us towards the next frontier: a decarbonised future. The challenge is reaching that future before it is too late.

The decisions that need to be made to reach that goal are going to change every aspect of the economy. We see investors asking whether their portfolio companies are taking the steps to get ahead of climate change forces. We see large mining companies spinning out or otherwise disposing of their fossil fuel assets. We see shareholders less willing to accept risks associated with fossil fuel such that traditional energy assets are now being described in some quarters as ‘stranded’ or ‘legacy assets’. We see the reallocation of capital to the deployment of new technologies, and alternative ways to power our energy systems, transport, agriculture, and the mining industries. We see nations considering radical changes to energy procurement and mobility. Increasingly, we see a sustained interest from commerce and State Government sectors in a green future, yet we are still waiting for our Federal Government to provide a coherent energy policy which both industry and the public can support.

Novel technologies for clean energy production are not new. The Paris Agreement in 2016, and the imminent 26th United Nations Climate Change Conference of the Parties in Glasgow in November 2021 have pushed them to the front line as governments take up the challenge to meet ambitious national emissions goals. As a result, the way the world uses and consumes energy is visibly changing. Buildings are being retrofitted with zero carbon ready technology, large-scale wind and solar farms are generating electricity for retail consumers and industrial users, and electric and fuel-cell vehicles are being rolled out onto purpose-built highways.

Achieving net zero emissions goals requires large-scale deployment of clean energy technology, which is reliant on securing a significant volume of critical minerals and rare earths. The mining industry is not only fundamental to the production of critical minerals and metals required to produce clean energy but is itself an industry which must decarbonise to reduce collective emissions. Many large Australian mining companies including Fortescue Metals Group and IGO are viewing Environmental, Social and Governance (ESG) as a strategic opportunity and a chance to collaborate with other stakeholders who similarly recognise the need to be cost competitive and innovative to drive down the costs of zero emissions products like green steel.

Due to our large mining industry in Western Australia we are enthusiastic and early adopters of green energy. Western Australia is well positioned to be a renewable superpower: the land is available, our natural endowment of sun, wind and ample salt water, and entrepreneurial spirit means our mining and energy companies have a unique opportunity for testing technologies and capitalising on the production of clean energy.

Perhaps the greatest economic opportunity is the use of hydrogen to stimulate decarbonisation activity. Green hydrogen has potential as a carbon-free energy source. We understand that the Western Australian Government is actively considering the land tenure and gas pipeline reforms that will be needed to support the development of large-scale renewable energy and green hydrogen projects. These reforms are also likely to reveal broader regulatory challenges for companies seeking to decarbonise. Prompt and innovative action will be needed to meet these challenges and ensure Australia’s increased competitiveness as an early adopter of green hydrogen. This will propel Australia to the forefront of the burgeoning hydrogen market.

By 2022, major European brands such as Mercedes-Benz and Volvo intend to integrate sustainable environmental processes into their traditional supply chain. For example, Mercedes-Benz has announced all vehicles will be manufactured in plants that are powered by renewable energy.

The Carbon Border Adjustment Mechanism (CBAM) announced by the European Commission in July and new European laws will undoubtedly be a game changer in the global value and supply chain. Any country exporting to the EU will be obliged to evaluate the effects of CBAM and adopt climate related reporting practices and green credentials to remain competitive. It is just a matter of time before consumers commit to carbon neutrality across their entire supply chains.

At a macro level, the price of energy has come down since the coal revolution sparked the industrial revolution, reducing the cost of electricity. The move to a clean energy economy threatens that low-cost model however the continued reduction in the cost of renewable energy, particularly wind and solar power and increasing Government incentives to transition, are expected to contribute significantly to the increased competitiveness of hydrogen production and distribution. This will encourage the scale-up of these technologies and infrastructure to levels that will make it competitive with the fossil-fuel industry.

The breadth of the new frontier means that all industries, including the legal industry, are working fast to understand the range of issues and become familiar with the unique legal needs of clean energy projects and the risk of not having a clearly articulated and fact-based transition strategy. Gilbert + Tobin has been running a national masterclass series, inviting the best in the field to present to the firm’s lawyers to deepen their knowledge of the opportunities and challenges involved in achieving emissions abatement and a clean energy future.

From scientists to executives, we have heard a spectrum of views and experiences, but so many of the themes remain constant:

The most significant opportunity now is that we have technology for clean energy generation and energy storage. Absorbing the risk and cost of scaling-up these technologies is key to balancing rhetoric and reality. In the case of hydrogen, the market may need to be incentivised, subsidised, and localised to be economic in the short-term.

The change is, and will continue to be, driven by industry. The private sector is setting, and is determined to meet, aggressive decarbonisation targets in order to obtain finance, retain and remain relevant to shareholders and operate with a social conscience and licence. The penalties for failing to set and meet these targets are felt in the margins and the loss of a social licence to operate. The Australian States are running their own race in the absence of Federal Government policy, but the thrust of change will still come from industry.

Australian companies can’t ship hydrogen tomorrow, although some significant work is being done in developing capacity to do so in the medium term. Many of the technologies required to decarbonise have not been developed or perfected at scale and there needs to be a balance of responding to the short-term needs of ‘keeping the lights on’ and the long-term need to decarbonise. There is still a role for liquified natural gas in the clean energy ‘transition’ as a stabilising fuel while building a clean energy future. Undoubtedly, oil and gas companies have a pivotal role to play in our medium term energy mix.

Hydrogen is just one piece of the decarbonisation puzzle. The scale-up of wind and solar in the last five years has enabled companies to think broader than hydrogen, which has allowed emissions cuts to come at the same time as economic growth. There is increasingly greater potential for offshore wind and other renewable technologies to meet the demands of the industry and the race to achieve net zero by 2050 is driving innovation. However, with innovation comes a grey box of regulatory and legal issues which must be understood and navigated.

The heat is on company directors. Various watershed moments in 2021, from the Dutch Shell decision to Exxon’s appointment of ‘activist’ directors and the Australian ‘Sharma’ case on the climate change duty-of-care, are transforming the way boards approach decision-making. Investor sentiment is moving fast and an authentic approach to sustainable objectives beyond merely compliance measures and greenwashing, is needed from boards of companies in every industry.

The Western Australian Government has been showing real leadership in supporting industry and the economy as it faces new challenges – including adding the ministerial portfolio of Hydrogen Industry Minister held by the Honourable Alannah MacTiernan MLC.

The energy transition is inevitable, and businesses need to be making decisions to ensure a better future. This is no longer just a matter of social conscience. It is a matter of social licence to operate, legal responsibility and remaining relevant. The uptick in the level of climate activism and recourse to litigation has put boards on notice of the need to account fully for climate risk and to consider the emerging social duty to reduce emissions. The translation of that duty to legal duties for boards and government ministers is on the radar of Australian courts and governments.

Despite the generations it has taken to create this paradigm shift, the challenges exist now and will need to be met with action to provide a sustainable outlook for future generations. Failure to do so is catastrophic – the Anthropocene cannot be humanity’s fleeting legacy in geological history. What is now the paradigm shift must very quickly become the convention.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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