Journey to carbon neutrality series: How to invest and allocate capital for the net zero economy

Energy and utility companies face major challenges as they seek to minimize their environmental impact. On the upside, the companies that take the lead in developing clean energy could rapidly create vast opportunities. In this series of four interconnected blogs, we map critical paths that energy and utility enterprises can take to help achieve carbon neutrality.

Recent statistics indicate the scope of the energy and utility sectors’ responsibility — and opportunity — to achieve carbon neutrality. In 2018, electrical power generation used 32% of US fossil fuel energy and emitted 35% of CO₂ from fossil fuel combustion, continuing a trend that’s been largely consistent since 1990. In 2019, electricity generation accounted for 25% of US greenhouse gas (GHG) emissions — slightly more than the industry sector (23%) and slightly less than transportation (29%). CO₂ accounted for 80% of US GHG emissions, and virtually all the fuel burned to produce US electricity is coal or natural gas.¹

Our message to you is urgent: It’s now time to move from aspiration to action on your journey to a clean-energy economy.

It’s time to refocus on the environment

With a new administration in Washington, environmental concerns have taken center stage as a policy priority for both business and government. The Biden-Harris campaign included confronting climate change and developing clean energy as central planks of its electoral platform, and the White House is now working to realize those objectives.

Biden’s targets include making sure that the United States will achieve a 100% clean energy economy and net zero GHG emissions by 2050, while halving 2005 GHG emissions by 2030. For Earth Day 2021, Treasury Secretary Janet Yellen called for a “whole-of-economy” strategy, in which public and private sectors collaborate to meet a Clean Electricity Standard that mandates carbon-free electricity generation by 2035. 

This ambitious agenda will likely have an enormous impact on how you and other EUM companies invest and operate. As we have reported, President Biden is seeking to realize his climate agenda with a $2 trillion infrastructure proposal. For companies in this sector striving to become leading innovators, this marks an historic moment to take proactive steps to prepare for the economy — and the regulatory environment — of the future. 

Look at the investment decision-making process

Capital investment planning defines priorities that drive the allocation of funds needed to acquire, build or enhance assets. Historically, this included financial or risk-reduction benefits. However, today it is also critical to consider how your investments will affect environmental, social and governance (ESG) initiatives and targets, with an overall goal of environmentally sensitive sustainability. Your company could achieve a competitive advantage by leading ESG efforts — but it could face significant risks by falling behind.

Currently, a top strategic ESG priority requires mitigating the direct and indirect environmental impacts of operations. Many energy and utility companies — and yours may be among them — are committing to short-term emissions reductions and longer-term net zero targets. These are typically aligned with the GHG Protocol, which provides standards and tools to help you measure and manage GHG emissions.

Most capital prioritization processes and tools are not yet aligned to value ESG metrics — in addition to financial and traditional risk metrics. However, the recent focus on critical capital projects (such as coal-ash-pond cleanups and oil field cap-and-abandonment projects) is closely aligned to ESG. It’s equally important to consider such carbon emissions-related outcomes in investment decisions — and to be able to defend them on an ROI basis.

Many companies are already factoring environmental impacts into their capital allocations, and they’re also analyzing expected benefits and costs through an ESG perspective. But there are other important considerations for you to evaluate. For example, any capital project should assess how minimizing your carbon footprint could enhance your enterprise’s reputation, while also reducing cleanup costs. Taking the lead on this front may mean adopting a much broader action plan of re weighing or rebalancing your priorities. 

By devoting more resources to achieving emissions goals and standards, you should be able to move capital projects that drive carbon capture and emissions reduction to the top of your strategic-priorities list. These broader considerations could include weighing projects that address emissions reductions, reductions in energy usage at the facility level, and reductions in water usage and waste production.

When emissions impacts are fully incorporated, your company can have a holistic analysis of the current capital project portfolio, which could provide valuable insights.

Some companies may need to adjust how they evaluate the environmental impacts of many of their projects. Others may also need to reevaluate capital planning for new and future projects, which will likely require them to build in the costs of deploying advancing technologies that cut GHG emissions. You need to determine which group best describes your company. 

In three installments of this series, we explore these kinds of projects and the technologies energy and utilities actors can use to pursue them in three key areas: carbon capture and sequestration, carbon upcycling and asset decommissioning.

^{_{1. EPA, Inventory of US Greenhouse Gas Emissions and Sinks 2020: Executive Summary; Overview.}}