Energy Transition Requires Team Effort From Government And Industry

Emily Pickrell, UH Energy Scholar

As both government and private industry grapples with the magnitude of the threat of climate change, both sides are recognizing there is only one successful path forward.

And it will mean working as a team.

It’s a departure from the last couple of decades, when the two sides often viewed each other as adversaries, working at cross purposes.

Yet the astonishing investment required, the magnitude of the landscape, and the short time frame to achieve the necessary emissions reductions makes the necessity of the partnership a requirement.

“There was always this distance between the government and industry,” said Chuck McConnell, the executive director for the Center for Carbon Management at the University of Houston and former Asst. Secretary of Energy in the Obama administration. “What the energy transition has done is to blur that line. Societal good is the name of the game.”

The energy transition is a chance for companies to show how they plan to contribute to this societal good of lowering carbon emissions. The size of the job means it cannot be achieved by government alone: the solutions will need to come from industry and through their broad commercialization.

Several major energy companies recently participated in the University of Houston Center for Carbon Management in Energy symposium series titled “Investing in the Energy Transition”. These companies said they are ready, willing and able to invest to reduce their carbon footprint.

In fact, the vast majority of the industry have expressed interest in doing so, with commitments for emissions reductions by 2030. Many are arguing they are shooting to become net carbon zero by 2050, though these achievements will invariably depend on how the results are interpreted.

Even so, the investment world is following the transition closely, eager to invest billions in everything from carbon capture and storage technology, hydrogen, and biodiesel, among others. It’s money that will be needed. Reaching net zero emissions by 2050 will require worldwide investments around $4 trillion annually, according to the International Energy Agency. That’s more than six times the estimated $630 billion annual amount being spent right now.

Where companies differ with government is how to choose the technologies that will deliver these results, and how to make them profitable for shareholders. Both the market and the government recognize the demand for energy is growing and that consumers want it to be reliable, resilient and affordable….and yes, lower carbon. The challenge ahead is not to choose one or two of these aims versus the other – but to solve them simultaneously.

Energy companies – from pipelines to large power companies – recognize that it is too early to pick technology winners. They are instead tending towards portfolios with a diverse collection of carbon capture technologies. The expectation is that the best solutions will evolve and be incredibly successful.

And other solutions that are the best choice now may not be so for the long term. 

“Continued investment in R&D is critical as we cannot fall into the trap of using today’s known solutions as our only bet for the future,” McConnell said.

Battery technology to support industrial solar power, for example, is incredibly promising, but researchers are still looking for ways to make sufficiently large batteries much more cost effective. It will take this technology leap-frogging ahead of what is currently available in the next ten years to support the kind of wide spread use of renewable electricity envisioned by the Biden administration.

And it’s too soon to know how electrification could compete against other future technologies that will be developed in the next couple of decades. This is especially true for applications such as the industrial furnaces in refineries and petrochemical facilities.

Right now, electrification doesn’t provide the solutions needed for some of this processing.  Other fuel sources such as de-carbonized hydrogen do – and should not be overlooked, amidst the enthusiasm for solar and wind power. 

Yet it will require an enormous investment in hydrogen production and the necessary carbon capture and storage networks to realize the demand for this decarbonized “blue” hydrogen.

It’s one reason that both companies and investors are encouraging the Biden administration to focus on the end game of net zero by 2050 more than specific technology solutions and mandates to choose winners and losers today.

The government can also help by pushing forward the big infrastructure needed for the transition – a need that the Biden administration recognizes. Moving towards a 100% carbon free power grid in the US will need investment of up to US$4.5 trillion over the next 10 to 20 years, according to Wood Mackenzie.

Public companies say they recognize that investors are increasingly looking for tangible evidence of climate change progress. The accepted annual report method of doing so – via environmental, social and governance targets, known as ESG – is acknowledged as being here to stay. Companies themselves predict more detailed and informative ESG reporting requirements.

Yet an overly prescriptive approach in reporting requirements could create resistance, with the focus moving to the letter of the law rather than the spirit.

Indeed, the development of the wide array technologies depends on companies viewing them as financially viable – and profitable. At least initially, this will be driven by tax policy, which means that companies are watching energy tax credits very closely. Establishing a reliable longevity and amount of these tax credits - that is longer than one political cycle - is critical, if they are to be a tool in driving company behavior.

For example, the biodiesel tax credit has been extended through 2026 at $1.00 per gallon, but drops down to 60 cents by 2027. It is unclear what will happen after that – an uncertainty that makes the tax credit largely ineffective in encouraging new investment.

Companies say the same is true for hydrogen and for airline fuels investments: tax credits that are too small and have too short a time span for companies to be able to plan the large-scale investments that would be required. 

The trick will be for the government to be able to determine the tipping point between encouraging a game-changing technology and just continuing to support an already mature industry.

Emily Pickrell is a veteran energy reporter, with more than 12 years of experience covering everything from oil fields to industrial water policy to the latest on Mexican climate change laws. Emily has reported on energy issues from around the U.S., Mexico and the United Kingdom. Prior to journalism, Emily worked as a policy analyst for the U.S. Government Accountability Office and as an auditor for the international aid organization, CARE. 

UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.