Given the economic impact of the past 18 months, investors, businesses and consumers alike may currently find it hard to take anything other than a short-term perspective when making decisions about investing, purchasing or when designing policies. However, as the world gathers to craft a response to an even bigger issue – climate change – it’s clear that a longer term view is needed.
In reality, the net zero commitments and actions that will flow from COP26 are likely to converge and redefine economic innovation – resetting the landscape in which decisions are taken and profits produced. I can see four distinct strands that will become the shared texture of future investments that produce long-term return: beyond the obvious technological innovations needed to address the climate change, we are likely to also see increased financial innovation, social innovation and policy innovation. To succeed, investors will need to make decisions in the light of all four priorities at once.
Credible plans, acceptable costs?
Net zero will be a hard goal to achieve, in any country or context. A clear and credible pathway must be established if the public are to support some of the changes it will involve. Issues like potential increases in energy costs or the ending of fossil fuel vehicles are both personal and political, as well as environmental and technological.
Investors will need to back solutions that demonstrate clear ‘whole system’ thinking in their contribution to net zero goals. There are instructive lessons to be learned from the circular economy – which similarly adopts a wide ranging justification for its measures, identifying wider environmental, social and economic benefits of adopting such a novel approach to resources and recycling. It’s a case of always using net zero to address wider vital goals and communicating the benefits as progress is made. The work we are doing with Enel is about ensuring we can advance renewable energy without producing additional waste and overusing resources.
Of course, no single low carbon energy source will ever be a solution in isolation, and an attractive collective alternative to traditional energy generating methods is needed to garner the support of investors and customers. Given that net zero represents a massive, system level change, investors will want to see innovation that tackles the goal in an integrated way.
Meeting net zero goals is about more than technology development and purchases. It will require a new level of business management, improved operational processes, a more rigorous use of data analysis and better tools for decision making.
As net zero goals bite, and economic practices like resource use reshape the business environment, organisations will need new models and to change their approach to value creation and capture. In parallel, government regulation and policy innovation will also play a critical role, as knowledge management can ensure new innovations flow to users, and the development of new products.
Net zero will also reframe roles and responsibilities within a more sustainable economic model. This is likely to also result in what we might call ‘social innovation’, where we see greater civic empowerment and involvement in decision making, as societies become more conscious of the changes that are needed.
Finally, these innovation threads will likely be joined by increased financial innovation, as the market develops and offers new instruments and mechanisms to manage new risks and lower the cost of capital in the emerging net zero economy.
If all this seems a fanciful or utopian prediction, consider the process that has led to the incredible growth (and low unit cost) of off-shore wind power. A combination of these different types of innovation was behind the dramatic fall in prices in the offshore wind industry, with projects coming online between now and 2030 producing power at an average cost of less than £50 per megawatt-hour over the course of their lifetime, compared to around £160 per megawatt-hour of just a decade ago. Off-shore wind is seen as a national priority in many countries, an opportunity for greater energy independence. It has also seen incredible technological and digital innovation.
Fundamental change requires investment
Evidence shows that innovation and investment is not spontaneously environmentally friendly: a coordinated set of policies and institutions, is required in order to shift the trajectory of economies so that path dependence favours clean innovation and investment. A clear, long-term view and vision must be communicated by governments to attract major investment into green energy.
Net zero deadlines are going to be tough to meet, there is no time to waste. Building momentum in new sectors means looking at four key factors – strategy, policy, frameworks and delivery – before making an assessment if a market can be established. The right level of capital expenditure and operational costs of any project must be fully understood, and financially sustainable processes developed to attract the right levels of investment. Understanding this pathway is something Arup has been working on behalf of the World Bank Group, developing a comprehensive approach for governments across the world to assess if the offshore wind market is an option for them, and can form part of their future energy strategy.
It will only be by taking an approach like this that any green energy alternatives will stand a chance of becoming a working reality in the timescales almost every government is now working to. Technology and business decisions must now be considered as one entire approach to enable a green recovery and thriving net zero future, mitigate climate change, sustain reasonable returns, and ensure a fair price for the consumer.
Net zero energy and decarbonisation
From national networks to individual assets, the fossil fuel era is drawing to a close. At Arup, we’re helping clients across the world to make the transition to decarbonised, secure and affordable energy.
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Finance and economics
We help clients by developing business cases, underpinned by economic and financial modelling. On larger programmes, our economics teams can research and evaluate the wider economic value of a proposition and assess its viability within existing and future regulatory and policy frameworks.