Between decarbonization and energy transition: how does the utility sector change?

Updated 17/01/2023

In order to stabilize the climate and limit the risks to the environment, science has long pointed us down a necessary path: energy transition, decarbonization, and reduction of greenhouse gas emissions into the atmosphere. It is the “net zero carbon” approach: the amount of carbon dioxide released through daily activities by a person, company, or country is balanced by absorbing or removing the same amount from the atmosphere. In fact, the “net zero carbon” formula is now interpreted in an even more stringent sense, referring to activities that manage to actively prevent the release of carbon dioxide, for example through sustainable production processes and the exclusive use of renewable energy sources.

Decarbonization, in particular, is a long-term goal in which utility companies have long invested attention and resources. The goal, shared with international institutions and organizations, is to achieve a significant reduction in GHG emissions (GHGs are Greenhouse Gases, among the main contributors to climate change) within a 10 to 30 year horizon.

 

 

Utility planners (those responsible for promoting and organizing innovation) have a history of excellence in planning power transmission, distribution, and generation facilities. This tradition of excellence has found in a formidable driver digitization, through which it is now possible to rethink decarbonization and how it can be implemented in the short term. Recent technological developments enable companies to set “more informed” strategies (because they are based on more accurate data) to increase resilience and operational efficiency and reduce environmental risks. 

We talked at length about the Utility sector: from the 5 trends for the future of the utilities sector to the new communication technologies within the sector.

Before describing the changes that are taking place in the utility sector, let’s try to answer two questions that are absolutely central to the discussion we want to pursue in this post: what are the main direct carbon emission systems that utilities are called upon to govern? And what decarbonization actions can utilities put in place to push an energy transition that is now more crucial than ever?

Direct sources of carbon dioxide and decarbonization actions

During energy production processes, carbon dioxide is emitted through the combustion of fossil fuels (oil, gas, and coal) and through nonenergy emissions (e.g., emissions associated with industrial processes and deforestation). 

Energy-related carbon dioxide emissions account for up to 83% of total emissions (source: McKinsey).

According to McKinsey (The net-zero challenge: Accelerating decarbonization worldwide) there are seven systems that harness energy and land resources for their operation, while at the same time constituting as many direct sources of global emissions:

• Energy (electricity and heat generation)
• Industry (all industrial processes, including steel, cement and chemical production, oil, gas, and coal extraction and refining)
• Mobility (all forms of transportation and movement of goods and people: air, rail, sea, and road)
• Buildings (heating and cooking)
• Agriculture (direct on-farm energy use, emissions from agricultural and fishing practices)
• Forestry and other land use (unlike the other systems, this one has the ability to absorb carbon dioxide)
• Waste (solid waste disposal and treatment, incineration, and wastewater treatment)

Because these energy and land-use systems are interdependent and each contributes substantially to emissions, accelerating a transition to zero net emissions requires simultaneous action on all systems, acting on economies globally, through a number of ways that are proving particularly effective:

• shifting the energy mix away from fossil fuels and toward zero-emission electricity and other low-emission energy carriers such as hydrogen; 
• the upgrading of industrial and agricultural processes in the direction of greater efficiency and environmental sustainability; 
• better energy demand management, for example through smart grids and smart meters; 
• the convinced adoption of typical circular economy logics; 
• a reduction in the consumption of emission-intensive goods; 
• the development and implementation of “capture technologies” through carbon storage (CCS); 
• the enhancement of greenhouse gas sinks.

Decarbonization and energy transition are two strategic issues that have political, social, and economic significance and are regulated within the legislative frameworks of individual countries and various international organizations. To understand how the utility sector is changing, we must then take a look at the context, European and Italian.

The European Green Deal for climate neutrality: a holistic and cross-sectoral approach

With the European Green Deal, the EU commits to achieving climate neutrality by 2050 by following up on the 2015 Paris Accords (made among 196 countries around the world). While the main goal remains to establish a framework of actions to limit global warming and address the impacts of climate change, the Deal states even more forcefully the need for a true transformation of Europe’s society and economy that is cost-effective, equitable, and socially balanced. 

It is the “Ready for 55%” legislative package that will translate the EU strategy into practical acts.

The December 12, 2019 European Council conclusions include, “The transition to climate neutrality will offer significant opportunities, for example, the potential for economic growth, new business models and markets, new jobs, and technological development”.

Thus, the approach taken is holistic and cross-sectoral: all relevant sectors, which are strongly interconnected, contribute to the ultimate goal with specific initiatives covering climate, environment, energy, transport, industry, agriculture, and sustainable finance.

Decarbonization as a decisive step to zero climate impact

When we consider that 75% of greenhouse gas emissions in the European Union are caused by the production and use of energy, we can understand how decarbonization of the energy sector is a crucial step in creating a climate-neutral European Union. Initiatives undertaken include: 

• supporting the development and deployment of cleaner energy sources (e.g., renewable energy and hydrogen),
• the integration of the EU’s energy systems,
• the development of interconnected energy infrastructure through energy corridors, 
• updating current legislation on energy efficiency and renewable energy.

The European Green Deal is in the groove of the 2030 Plan that the Italian government, along with institutions and utilities in other European countries, is also following through a set of concrete actions.

The 2030 Plan, which aims to implement what is set out in the European Regulation on the Governance of the Energy Union and Climate Action, is the instrument with which each state contributes to the grounding of the rules and measures set out in the European Energy and Climate Package 2030 (which in turn builds on the decisions of the Council of Heads of State and Government in October 2014, in which the EU framework for energy and climate policies for 2030 was approved). 

The European Energy and Climate Package is expressed on five “energy dimensions:”

1. decarbonization (including renewables); 
2. energy efficiency; 
3. energy security; 
4. internal energy market; 
5. research, innovation, and competitiveness.

So far we have talked about the programs for environmental sustainability and climate normalization to which all organizations, private and public, operating in water, energy, and waste management services adhere in various capacities. Therefore, these guidelines and virtuous behaviors prescribed by international rules are adhered to, all the more so by utility companies which, although they demonstrate a substantial wealth of initiatives, also have some weaknesses.

European energy transition: the weaknesses of utility companies

The most important parameter by which utility companies’ commitment to reducing their impact on the environment is measured today is carbon dioxide emissions. Against the stated commitment of companies in the sector on this issue, there still seems to be considerable room for action. 

According to the Altreconomia website, most European utilities are reportedly lagging behind the very ambitious short-term goals set by the International Energy Agency (IEA) agenda. In particular, for both contingent and structural reasons, they still seem far off: 

• the divestment in coal by 2030 in EU and OECD countries (by 2040 for the rest of the world); 
• the complete decarbonization of power generation by 2035, with the shutting down of fossil gas plants; 
• increasing power generation from renewable sources to 60% of the energy mix by 2030. 

And how are Italian utility players meeting the challenge of the green transition?

 

 

Italy’s ecological transition, between decarbonization, digitalization, and the circular economy

In 2020 – the reference year of Utilitalia’s Report Italian Utilities for the Ecological and Digital Transition 2021 – the economic transition cost Italian utilities €11 billion, a figure that is up from the previous study and testifies that investments in decarbonization, circularity, and digital transformation have not decreased at all, even in the midst of a pandemic emergency. 

This €11 billion refers to what has been distributed to workers, shareholders, the public administration, lenders, and local communities and reinvested in the company. 

In detail, sustainable investments by Italian utilities are worth €4.5 billion, spread over three lines of action:

• €603 million in decarbonization;
• €287 million in digitalization;
• €182 million in the circular economy.

Among the factors that can help accelerate decarbonization processes, not only in Italy, are: public-private synergy, an adequate regulatory framework, and digital transformation.

Decarbonization and digitalization: how to put customer satisfaction at the center

According to the paper Utilities leading the ecological transition: the decarbonization challenge published by Utilitalia, digitization plays a decisive role in decarbonizing economies.

In the report, which focuses on power generation and distribution, great emphasis is placed on the pervasiveness of digitization:

“Overall, the global impact of digitization on industrial emissions has been estimated at 12 billion tons of CO2 equivalent by 2030: this figure is linked to the pervasiveness of digitization, which has an enabling role for most of the technologies that will enable future emissions reductions”.

Among the ongoing trends in the utility sector, which we devoted ample space to in one of our recent posts,we had also mentioned digitization. Here, we want to highlight, once again, the benefits produced by digital technologies on both service quality and operational operation: from reducing outages and downtime, to savings from better utilization of networks and facilities, from cutting operating costs, to improving indicators related to safety, reliability, customer satisfaction, and compliance. 

It’s not just about digitization of infrastructure; in the utility sector, the revolution is also about digitization in the relationship with users: from the use of digital channels for customer contact and support, to the provision of integrated digital services (e.g., with home automation). 

Thanks to the latest technologies, utilities today can: 

• upgrade facilities and infrastructure remotely;
• collect and analyze massive amounts of data; 
• integrate the information obtained into cloud-based control and management systems; 
• enhance cybersecurity,
• rethink the customer experience.

Investing in digitization can really make a difference in customer service delivery and the relationship with end users. Utility company leaders are now able to gain a competitive advantage by investing in optimizing the consumer journey. Think, for example, that in the case of outages, customer satisfaction comes from the quality of service delivery as much as from the resolution of the problem: the timeliness with which clear and complete information is provided and the ease of access to the personal account count as much as the speed of physical intervention on failures and malfunctions. 

In addition, digital and self-service channels are key factors in achieving greater satisfaction at a lower cost: from 2018 to 2020, utilities that invested in their digital tools experienced an average increase in customer satisfaction of 2%, while those that did not experienced an average decline of 1% on the same metric. This is also confirmed by the International Energy Agency. 

In its study Digitalization & Energy, the IEA describes the transformative power of digitization while pointing out some of the dangers: “digitization is helping to improve the security, productivity, affordability, and sustainability of energy systems around the world. But it is also raising new security and privacy risks, disrupting markets, businesses, and workers”.

A highly interconnected energy system, where the customer’s relationship with utilities becomes increasingly valuable, is evolving along three lines: digitization, decentralization, and decarbonization. In particular, increased customer engagement, achieved through personalized communication, can help prevent, control, and resolve potential disruptions related to demand, disintermediation, and unexpected weather events.