Scaling Up: Decarbonization of Hard-to-Abate Sectors

Russell Reynolds Associates recently hosted the eleventh installment of the Energy Matters, People & Money networking series. The event brought together a community of industrialists and investors from across the energy transition ecosystem to discuss perspectives on scaling companies to support the decarbonization of hard to abate sectors.

Keynote Speaker  

Brian Davis
Chief Executive Officer, C2X (A.P. Moller Holding’s Green Methanol Venture)

Yves Vercammen
Chief Corporate Officer, Tree Energy Solutions (TES)

Many hard-to-abate sectors will require green molecules—not green electrons—to decarbonize successfully.

Electric natural gas (e-NG)

e-NG is a cost-competitive and scalable solution, given it can be produced by combining green hydrogen with biogenic CO2 and distributed via existing infrastructure without the need for upgrades. By replacing fossil fuels with e-NG, emissions can be reduced by up to 95%.

Startups play a critical role in this evolving landscape. Tree Energy Solutions (TES)—a startup focusing on the development of e-NG—has ambitions to produce 15 TWh annually by 2030, and avoid 2.5M tons of CO2 emissions annually. The decreasing costs of renewable energy sources and electrolysers enhance e-NG’s production outlook, with electrolysers currently accounting for more than 60% of capex.

Green methanol

The shipping industry alone is expected to add an additional 10M tons of demand by the end of the decade. Green methanol, produced either from biomass or captured carbon and hydrogen from renewable power, can reduce shipping emissions by 60% to 95% compared with conventional fossil fuels. But scaling of production is currently limited, and expensive.

In 2023, Maersk began a sustainable revolution in shipping supply chains with the launch of the world’s first green methanol enabled container vessel. Their goal is to use green fuels for 25% of their global fuel consumption by 2030 – a feat which will require more than 5M tons of green methanol per year. However, production capacity in 2023 was less than 100,000 tons and continues to lag significantly behind demand.

Maersk (and its majority-owner, A.P. Moller Holding) established C2X, an independent startup intended to accelerate the availability of green methanol at scale and bring 3M tons to the market by 2030. As a solution, green methanol has the potential to create decarbonization pathways for many industries beyond shipping, including aviation, chemicals, and LPG.

An enabling policy environment will be required to scale up production and provide a competitive source of green molecules to customers.

There are limited institutional-level equity investors with an appropriate risk appetite, exacerbated by the first of a kind technology risk involved. According to Bloomberg NEF, just 3% of global investments in energy transition in 2022 went to low-carbon technologies for industry. End-users in hard-to-abate sectors are often resistant to the long-term offtake agreements that developers need to make projects bankable.

Price premiums for green molecules significantly exceed what most customers are willing to pay, particularly in the shipping industry. Without direct intervention, alternative fuels will continue to exceed the cost and price of fossil fuels and many customers will continue to pursue the lower cost option. For the few who are willing to pay the premium, GHG (greenhouse gas) protocol and market standards for emissions accounting and certification should be further developed.

Regulatory incentives have catalysed scaling in some markets. In the US, the Inflation Reduction Act’s tax credits have triggered increased investment in green hydrogen production, as well as loan guarantees from the Department of Energy. China, which already produces green hydrogen at almost half the cost of the US, is working to bring down the costs of electrolysers. To compete on a global scale, the rest of the world must find ways to reduce production costs. To do this, an enabling policy environment is critical. Europe has set targets which state that renewable fuels of nonbiological origin (RFNBOs) should account for at least 1% of the fuel supplied to the transport sector and 42% of the hydrogen used in industry in 2030, rising to 60% in 2035.

Leadership implications

1. Success will depend, in part, on a strong operating model that allows for fast testing and learning cycles and a bias toward partnerships. 
2. When scaling up, balancing the need for experienced leadership with entrepreneurialism will be key to establishing and manage a high-performance culture.
3. The war for talent will continue and the need for the non-corporate, risk takers is growing. Furthermore, companies and investors will need to think carefully about their scale-up story, level of investment, and compensation needs to attract and retain top talent.

Authors

Chris Nicholson is a member of Russell Reynolds Associates’ Global Industrial & Natural Resource Practice, covering the Energy markets. He is based in London. 
Abigail Skerrett is a member of Russell Reynolds Associates’ Global Industrial & Natural Resource Practice and leads the firm’s Global Energy Transition Practice. She is based in London. 
Shola Brown is a member of Russell Reynolds Associates’ Global Industrial & Natural Resources team. She is based in London.

Please get in touch if you would like to discuss these themes in more detail, and/or attend the next Energy Matters series event on May 22. 

We will hear from Judith Hartmann (Former Executive Vice President and Chief Financial Officer, Engie) who will share perspectives on industrial decarbonization.