22 July 2010

Don't Believe Me? Ask Lloyd's of London

A newly released report from Lloyds Insurance and Chatham House does an amazing job of putting the case for Transition to a business audience (you can download it here).

We can expect dramatic changes in the energy sector in the coming decades. This report encourages businesses, both in the energy sector and beyond, to look at how this will impact on their firms. The transition towards a lowcarbon economy and the interim volatility in traditional fossil fuel markets presents businesses with numerous risks but also opportunities. In order to reduce potential vulnerability and seize opportunities, business should be aware that:

1. Energy security is now inseparable from the transition to a low-carbon economy and businesses plans should prepare for this new reality. Security of supply and emissions reduction objectives should be addressed equally, as prioritising one over the other will increase the risk of stranded investments or requirements for expensive retro-fitting.

2. Traditional fossil fuel resources face serious supply constraints and an oil supply crunch is likely in the short-to-medium term with profound consequences for the way in which business functions today. Businesses would benefit from taking note of the impacts of the oil price spikes and shocks in 2008 and implementing the appropriate mitigation actions. A scenario planning approach may also help assess potential future outcomes and help inform strategic business decisions.

3. A ‘third industrial revolution’ in the energy sector presents huge opportunities but also brings new risks. Of particular importance for new technologies is the risk of constraints on raw materials such as rare earth metals, as scarcity may drive up costs. The rapid and widespread diffusion of some new technologies may also incur negative environmental implications.

4. Energy infrastructure will be increasingly vulnerable to unanticipated severe weather events caused by changing climate patterns leading to a greater frequency of brownouts and supply disruptions for business. This throws out a critical challenge to energy providers, investors and planners in terms of choosing the location of new infrastructure and fortifying existing plants and networks. Those businesses for which uninterrupted access to energy is of fundamental importance should actively consider investing in alternative energy supply systems.

5. Increasing energy costs as a result of reduced availability, higher global demand and carbon pricing are best tackled in the short term by changes in practices or via the use of technology to reduce energy consumption. The wider use of renewable energy and even self generation, bring added price and supply security benefits.

6. The sooner that businesses reassess global supply chains and just-in-time models, and increase the resilience of their logistics against energy supply disruptions, the better. The current system is increasingly vulnerable to disruption, given the trends outlined in this report.

7. While the vast majority of investment in the energy transition will come from the private sector, governments have an important role in delivering policies and measures that create the necessary investment conditions and incentives. If the global carbon market is to become a reality then government action must be taken to bring additional price stability and transparency. Investing in a secure, low-carbon energy future may have higher upfront costs, but will deliver lower cost energy in the future. Sound renewable energy and demand side measures are crucial elements in delivering the necessary energy services for businesses and the expected return on investments.

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