Table of Contents
Introduction ...................................................................................................1
How Decarbonization, Decentralization, Digitalization
and New Players Are Changing the Power Industry ..................................................2
Analysis: ENGIE’s Strategy Toward a Low-Carbon Transition .................5
The Role of Innovation in the Transition to a Low-Carbon Economy .......................5
Understanding Innovation in the Energy Context ..........................................................................5
Innovative Technologies to Watch in the Energy Transition ..........................................................8
Where ENGIE is Headed ...............................................................................................................10
Recommendations for ENGIE ......................................................................................................13
The Role of Policy and Regulation in Supporting Green Innovation 15
Pricing Carbon ...............................................................................................................................16
Supporting Biofuels and Energy Efficiency ................................................................................19
Designing Policies for Hydrogen ..................................................................................................21
Recommendations for ENGIE .....................................................................................................24
Building and Enhancing Shareholder Support for the Transition .........................24
Shareholder Interest in Environmental Investments ....................................................................25
Communicating Environmental Progress to Shareholders ........................................................26
Recommendations for ENGIE .....................................................................................................28
Analysis: Summary & Recommendations ................................................30
Interview Questions & Responses: Transcript ...........................................32
Appendix 1. Sample Legislation to Spur Investment in US
Green Hydrogen Infrastructure .....................................................................................48
Appendix 2. ENGIE Event Announcement ...................................................................50
About the Authors ...........................................................................................................51
About ENGIE ..................................................................................................................54
turbines at Biedesheim, Germany.
Karsten Würth
Introduction
by Nicola De Blasio
Senior Fellow at Harvard Kennedy School’s Belfer Center;
former Vice President, Head of R&D International Development at Eni
Providing secure, reliable, affordable energy that is needed to fuel
prosperity for all without causing devastating environmental conse-
quences is perhaps the greatest challenge of the 21st century. Over the
coming decades, global energy systems will need to transition from
an era which relied on fossil fuels to one more dependent on clean
energy. This transition will not simply consist of replacing one energy
source with another. Rather, it will affect the systems, networks, and
partnerships that embody the energy industry as we have known it for
the last century. Many of these changes will be driven by technological
innovation, which in turn will impact the nature and value of exist-
ing assets, supply chains, and regulatory and policy institutions. But
innovation by itself is not the goal; the real objective is to deploy inno-
vation at scale and bring the ensuing products and services to market
in a secure, reliable, and affordable way.
Academia, business, governments, and civil society are all searching
for innovative solutions to actively decarbonize all energy systems and
sectors, and yet today’s pace of energy innovation is simply not fast
enough to meet the challenge. Why is this not happening more rap-
idly? What needs to be done to speed up the innovation effort?
Success is possible, but it will require close coordination of policy,
technology, capital, and society. Partnerships between the public and
private sector will be central to this effort and must be complemented
by the ability to educate all stakeholders on the challenges and oppor-
tunities inherent in the energy transition.
By focusing on real-world energy companies and eliciting the perspec-
tive of stakeholders, our goal is to uncover lessons learned from the
private sector and recommend new paths to lead in the transition to
a low-carbon economy. What steps is your company taking to adapt
and change in response to the climate crisis? What is the role of the private
sector in meeting or exceeding the Paris Agreement targets? Where are
there opportunities for leadership? As part of the new Global Energy Tech-
nology Innovation (GETI) initiative at Harvard Kennedy School’s Belfer
Center we asked these and other questions of industry leaders around the
world.
In the spring of 2020, I convened the inaugural student study group
“Energy Innovation and the Transition to a Low-Carbon Economy: Advis-
ing Fortune 500 Companies.” This report, part one of a broader series of
interactions with leaders in energy and innovation and Harvard students,
dives into these issues through the lens of a multinational utility. We pres-
ent the insights of ENGIE’s Executive VP Shankar Krishnamoorthy, who
is leading the company’s strategy and innovation efforts, and provide the
study group participants’ advice on how ENGIE could continue its low-car-
bon transition into the future.
How Decarbonization, Decentralization,
Digitalization and New Players Are Changing
the Power Industry
No one really knows how fast the transition to a low-carbon economy
will move, but one thing is certain—electricity is at the heart of this
transformational change, with power demand increasing in the build-
ing, transportation, and industrial sectors. This growth is creating new
challenges and opportunities for how to meet demand while addressing
climate change and accelerating the transition to a low-carbon economy.
Technological innovation will be key to driving the deep decarbonization
of energy intensive sectors such as power, mobility, buildings, and indus-
try; and where direct electrification is not feasible, green synthetic fuels or
hydrogen produced from renewable electricity have the potential to tackle
“hard-to-abate” sectors.
The power industry has been experiencing a disruption of unprecedented
scope and speed in the way electricity is generated and in the associated
business models. In a way, much of the industry was caught unprepared
by the move from large fossil fuel powered plants to distributed renewable
generation and by the need to manage revenue downturns, while meet-
ing the demands of environmental and technology conscious consumers.
These rapidly emerging trends of decarbonization, decentralization and
digitalization require fundamental changes to the structure of the energy
system as we know it and the design of appropriate market structures iden-
tifying cross-cutting benefits and costs, to recognize the full value of all
generation options.
If this were not enough, the power industry is also facing a new competi-
tive threat—the entrance of traditional oil and gas companies (IOCs) into
power markets. Historically, IOCs had considered a move into electricity as
a step too far, with the sector seen as oversupplied and highly politicized.
However, the recent decision by Shell and others to sell electricity directly
to retail customers is yet another example of how quickly the sector is
changing. Why are IOCs entering the electricity markets?
The need to address climate change and play a role in the transition to a
low-carbon future is one obvious reason, but there are many more, includ-
ing the state of the energy landscape. Global markets are flush with natural
gas and at the same time we are seeing record investments in new supplies
of liquefied natural gas (LNG). Like all commodities, natural gas goes
through cycles. However, this is more than just cyclical behavior—markets
are facing a downward super cycle—where record oversupply coincides
with record investments in new supply. This was a challenge even before
the COVID-19 pandemic, which has also drastically reduced demand. In
a buyer’s market, it is logical to try to get closer to final customers, estab-
lishing long-term agreements to reduce risk. An integration along the value
chain also gives IOCs access to new business areas such as smart mobility,
connected home services and/or demand side response. For traditional
utilities and retailers, whose business models are already under pressure,
this represents a dangerous competitive threat.
In this context of increasing competition, technology innovation will be
even more critical for both incumbents and new players, not only as a
means to gain a competitive advantage but also to accelerate the transition
to a low-carbon economy at scale. Success is possible, but to achieve it,
technological innovation must be complemented by:
• Redesigning policy and regulatory frameworks: Advance and
reform regulation to enable full integration of distributed energy
resources, spur innovation, and define new roles for distribution
network operators and end-consumers as active market partic-
ipants. Define clear and stable decarbonization targets. Design
market structures identifying cross-cutting benefits and costs, to
recognize the full value of all generation options—a key step in
reaching decarbonization targets an optimizing cost, while guaran-
teeing security of supply.
• Deploying enabling infrastructure: Define clear market-wide
rules around ownership and cost-recovery of physical assets,
decarbonization targets, data ownership and cybersecurity. This
will reduce the risk of stranded assets, allow planning security, and
provide needed legal protections.
• Redefining customer experience: Incorporate the new reality
of a digital, customer-empowered, interactive electricity system.
Simplify and tailor services.
• Embracing new business and public-private partnership (PPP)
models: Pursue new revenue sources from innovative distribution
and retail services. Shift from asset-intensive business models
to service provider platforms. Spur innovation and the ability
to educate all stakeholders on the challenges and opportunities
inherent in the energy transition. Bolster clean energy solutions by
de-risking investments and lowering the cost of capital.
Analysis: ENGIE’s Strategy Toward
a Low-Carbon Transition
by Zul Kapadia, Abigail Mayer, Johanna Schiele, and
Rees Sweeney-Taylor
The Role of Innovation in the Transition to A
Low-Carbon Economy
Innovation will be critical in the transition to a low-carbon economy.
Meeting the goals of the Paris Climate Agreement requires reworking our
existing energy infrastructure, but it is easier said than done. Rethinking
energy systems hinges on reconciling the interests of many existing stake-
holders: investors, banks, governments, energy companies, and consumers.
Developing and fostering new ideas is the first step toward illuminating the
frontiers of what is possible.
Our discussion with Shankar Krishnamoorthy drives this concept of
innovation. We begin by trying to understand what innovation is, why it
matters, and how to support it. We then provide a breakdown of innova-
tive technologies that Krishnamoorthy sees as critical for the transition to a
low-carbon economy. Next, we investigate how ENGIE commercializes
innovative technologies in the context of current initiatives and projects.
We conclude by offering recommendations designed to build on and accel-
erate ENGIE’s innovation efforts.
Understanding Innovation in the Energy Context
The meaning of innovation is inherently nebulous. In the energy context,
it can be a new approach to providing a service, the creation of a new
product, a novel development for previously inaccessible markets, or an
altogether revolutionary technology. Innovation diverges from what came
before and charts a new path into unknown territory. At its core, it is the
seed of opportunity. We agree with Krishnamoorthy’s view that innovation
matters because it offers a mindset—the notion that something original
can be done—full of possibility to those working toward a low-carbon
energy future.
To illustrate the impact innovation can have in the energy sector, Krishna-
moorthy recalls the success story of renewables. Just in the last decade, for
example, the price of solar has dropped by a factor of five, whereas global
installed capacity has grown by a factor of 10 to about 540 Although
solar and wind are intermittent and provide less than 10 percent of global
power generation,2 the speed and scale of their penetration is heartening
for those who are working to address climate change and accelerate the
needed energy transition.
Figure 2. Renewables Costs (USD/KWh) over Cumulative Deployment
(MW). Sources: IRENA Renewable Cost and Auctions Databases;
GWEC, 2017; Europe 2017, Make Consulting 2017 and
SolarPower
Europe 2017.
1 IRENA (2019), “Renewable Capacity Statistics.”
2 IEA (2019), “World Energy Outlook.”
Innovation is, however, a difficult endeavor. It requires countless iterations
and even then, is likely to result in failure. Some studies put the failure rate
of new products and technologies at a staggering 95 Moreover,
innovating is expensive, so cost considerations become central to the pro-
cess as well.
Krishnamoorthy recommends collaboration as a key strategy to foster
innovation and help share the associated risks and costs. His example of
gasoline stations illustrates how many companies can benefit from working
together in developing a standard technology. In such endeavors, the initial
development costs are shared, hence there are more resources available to
try different technological solutions, and if successful there are significant
positive network While we agree that this approach is helpful, we
also believe it is important to dwell on the dynamic of such cooperative
agreements. How are they formed? Is it mostly organic? Does the imple-
mentation pace match the urgency of the climate crisis? Is there a diversity
of perspectives and issues being considered? How can we meaningfully
track and accelerate such efforts? Properly fostering innovation will be cru-
cial if we are to meet the goals set out in the Paris Climate Agreement.
Finally, when a successful innovative technology has been developed, we
recognize that its value might range from being incremental to a disrup-
tive game-changer. By understanding what innovation is, the challenges it
encounters, and how to foster it, we hope that we can better set our expec-
tations for how the energy transition may unfold.
In terms of key technologies needed for the transition, as Krishnamoorthy
indicates, we agree that it is helpful to focus on those related to anthro-
pogenic emissions. Energy-related emissions make up approximately 73
percent of global greenhouse gas (GHG) On the one hand, this
makes the energy industry a sector with huge transformational potential.
On the other, the sector is characterized by long-term investments, making
3 Nobel, C. (2011), “Clay Christensen’s Milkshake Marketing” HBS Working Knowledge: Business Knowledge for
Business Leaders ing, accessed June 6, 2020.
4 The network effect is a phenomenon whereby increased numbers of people or participants improve the value
of a good or service.
5 Ge, M. and Friedrich, J. (2020), “Four charts explain greenhouse gas emissions by country and sector” World
Resources Institute by-country-sector,
accessed June 11, 2020.
changes of direction difficult and slow. This duality is at the heart of the
question: what role will innovation play in the energy transition?
Innovative Technologies to Watch in the Energy Transition
In this section, we dive into key technologies that will play a critical role in
the transition, as outlined by Krishnamoorthy. These include renewables;
short- and long-term storage; carbon capture, utilization, and storage
(CCUS); hydrogen; and biomass. We also provide an analysis of how the
public sector can support their development and deployment, as well as
how companies can access the needed capital.
The path for a successful global transition is relatively clear, and supported
by a large body of research and system costs modelling. On the demand
side, energy efficiency is the backdrop for all low-carbon scenarios. With-
out lower energy demand, the Paris climate goals will be hard to achieve
under any transition On the supply side, emission efficiency
improvements of fossil fuel-based technologies are insufficient to reach
meaningful reductions. Fortunately, independent of GHG-emission goals
and demand projections, the least-cost power system is likely one based on
large-scale renewables, in particular solar PV and wind,7 complemented
with some gas peakers in the medium term, and green synthetic fuels and
hydrogen in the long run.
Once more, renewables’ success story offers some context on the speed
and impact that innovation can have on energy systems. Solar and onshore
wind levelized cost of energy (LCOE) are already competitive with newly
built coal or gas plants. In some cases, renewables are even cheaper than
fully depreciated fossil fuel While the costs of fossil-fueled power
plants have stagnated for decades and those of nuclear plants have esca-
lated, LCOE for renewable energy continues to fall steeply.
6 IEA (2016), “Energy Efficiency Market Report 2016.”
7 MIT Energy Initiative (2011), “The Future of the Electric Grid.”
8 IRENA (2019), “Renewable Power Generation Costs in 2018.”
At the same time as renewables penetration increases, intermittency issues
need to be addressed, together with the cost of the required grid improve-
ments. This makes storage technologies a key part of the low-carbon
energy puzzle. In the area of short-term imbalances, grid-scale batteries,
smart charging of electric vehicles, heat pumps and digitized demand-side
response will be crucial. The successful implementation of these options
also hinges on the digitalization of energy services. Addressing mid- and
long-term imbalances is more challenging and innovation will be key.
Storage solutions that can bridge several days or weeks are unlikely to be
feasible without liquid or gaseous fuels. Green hydrogen,9 ammonia, and
synthetic fuels are potentially promising solutions.
In more general terms, the successful deep decarbonization of all energy
intensive sectors—including mobility, buildings and industry—will require
the deployment at scale of clean energy carriers, like Whilst
some sectors can be directly electrified, hydrogen has the potential as
well to tackle “hard to abate” industrial processes, like steel production.
Hydrogen can also be used to make fertilizers, chemicals, green ammo-
nia, and synthetic fuels. As green hydrogen capacity is being ramped up,
blue hydrogen, made from natural gas with CCUS, could be a bridge
technology.
The importance of investing in long-term decarbonization solutions now
for a future with much larger renewables penetration is being acknowl-
edged by more and more stakeholders. In July, the EU announced the most
ambitious green stimulus in history with a 500 billion euros The
European Commission had also announced the formation of a Hydrogen
Alliance,12 and is committing 10 billion EUR to hydrogen infrastructure
projects as part of the COVID recovery package. This is combined with
a clean hydrogen strategy exploring how to make the EU climate-neutral
9 IRENA estimates that to achieve the Paris agreement around 8 percent of global energy consump- tion will
be provided by hydrogen (IRENA, Global Renewables Outlook, 2020).
10 Pflugmann, F., and De Blasio, N. (2020), “The Geopolitics of Renewable Hydrogen in Low-Car- bon
Energy Markets” Geopolitics, History, and International Relations 12(1): 9–44 doi:
GHIR12120201.
11 Bloomberg (2020), “EU Approves Biggest Green Stimulus in History With $572 Billion Plan”
history-
with-572-billion-plan accessed August 20, 2020.
12 Simon, F. (2020), “EU announces ‘Clean Hydrogen Alliance’ for launch in the summer” EURACTIV
ance-for-
launch-in-the-summer/ accessed June 15, 2020.
by National recovery plans of member countries also focus on
hydrogen, for example the dedicated German Hydrogen Strategy, pledg-
ing nine billion EUR for R&D, industrial scaling, and hydrogen trade
Biofuels and biogas are also likely to play an important role. However,
agricultural land use, forest protection, and fuel crops land use are already
in competition. Without improved governance around land use change
(LUC), biomass from fuel crops will not necessarily be low-
Especially in regions with weak regulation around deforestation, fertilizer
use, and land management practices, carbon abatement effects would be
low. Areas of innovation include new sources of bioenergy for fuels, such
as algae, as well as BECCS (bioenergy crops with CCUS).
The breakdown of the above technologies offers some insight into where
innovation will be needed to accelerate the transition. In the next section,
we investigate how ENGIE supports innovative technologies and where it
is focusing its efforts.
Where ENGIE is Headed
In recent years, ENGIE has turned to earlier-stage innovative companies
to leverage and access external innovation in the markets. In 2014, the
company established a corporate venture arm, ENGIE New Ventures. It
is a “€180 million fund dedicated to making minority investment in tech-
nology startups driving the energy transition.”16 The fund targets Series A
to C funding with typical investment amounts ranging between three to
five million The investment mandate includes companies that are
creating technology solutions and new business models for “green gases
13 European Commission (2020), “A hydrogen strategy for a climate-neutral Europe.”
14 BMWi (2020), “Die Nationale Wasserstoffstrategie” Die Bundesregierung
Redaktion/DE/Publikationen/Energie/ accessed June 10, 2020.
15 UK Committee on Climate Change (2018), “Biomass in a low-carbon economy” -
accessed June 18, 2020.
16 ENGIE (2014), “ENGIE New Ventures: Corporate Venture Capital for Innovation” http://innovation.
accessed June 29, 2020.
17 ENGIE (2014) “ENGIE New Ventures: Our Approach”
accessed June 29, 2020.
(hydrogen, biogas), carbon capture and usage, energy efficiency, digital
applications for industrial services, renewable and decentralized energies,
energy storage and management.”18 We believe the fund’s purpose is well
aligned to support the energy transition. Since its founding, the strategic
fund has made 26 investments. Since venture-backed companies usually
take between eight to ten years to go to market,19 it remains to be seen
which of ENGIE’s earliest investments might have a transformational
impact. Overall, while the venture capital model helps to support ear-
ly-stage companies, we must consider whether ENGIE’s capital is making
a difference or whether it is a way to jump onto the venture capital band-
wagon, while externalizing R&D activities. While ENGIE’s fund size is a
drop in the bucket compared to the over € trillion invested by venture
capital globally over the last decade,20 we believe ENGIE brings addition-
ality thanks to its market access, business insight, technological expertise,
and ability to scale-up technologies and companies. However, we believe
these same competitive advantages need to be made available to a broader
set of start-ups, far beyond the original 26 companies targeted for invest-
ment, if ENGIE is to lead in the energy transition.
From our discussion with Krishnamoorthy, it is clear that ENGIE has many
assets, other than their corporate venture fund, that can be instrumental
in the transition. ENGIE’s internal R&D capacity includes more than 900
researchers and scientists. The Technology-Watch program has decades of
data and insights into novel technologies; and ENGIE has a history of cre-
ating partnerships with a variety of organizations in the energy ecosystem,
including universities, national laboratories, government agencies, and
other Moreover, ENGIE has a broad global footprint span-
ning 70 countries,22 providing the company with a diversity of perspectives
and the ability to diversify risk across their portfolio. Finally, as an A-rated
18 Ibid.
19 Szmigiera, M. (2019) “Median Time from Initial Venture Capital Financing to IPO Exit in the United States
from 2007 to 2018”
ture-capital-exit-usa/ accessed June 18, 2020.
20 Rowley, J. (2020), “The Q4/EOY 2019 Global VC Report: A Strong End To A Good, But Not Fantastic, Year”
Crunchbase News strong-end-to-a-
good-but-not-fantastic-year/ accessed June 10, 2020.
21 ENGIE (2020), “Sponsoring and Partnerships” nerships,
accessed June 29, 2020.
22 ENGIE (2020), “International Presence” tional-
presence accessed June 29, 2020.
2.
utility, the cost of capital it can access is low, which is a valuable competi-
tive advantage. All of these strengths should be developed further with an
aim toward supporting innovation and accelerating the energy transition.
ENGIE is particularly focused on green hydrogen. Krishnamoorthy believes
hydrogen offers a holistic solution when coupled with renewables, and
notes that hydrogen value chains still have plenty of room for inno- vation.
At the same time, while companies are entering the space more decisively
than they did 15 years ago, Krishnamoorthy believes the key challenge is
still economics: “by some estimates, hydrogen is expected to be economical
by 2030. Others say that by 2040, you will have consumption of green
hydrogen all over the world.” There is no clear consensus, however, on
annual demand for hydrogen, as estimates range widely between 5 and 78
EJ, equating to around 14 percent of the world’s total energy demand by
2050. The key drivers for this growth include feedstock, transportation, and
industrial The cost to produce green hydrogen today ranges from
to USD/kgH2. By comparison, producing hydrogen from coal or
natural gas ranges from 1 to USD/kgH 24 The price gap between these
alternatives indicates how much innovation will be needed before hydro-
gen will become cost-competitive.
We also discussed a series of ENGIE’s ongoing projects to reveal deeper
insights into green hydrogen innovation. In Marseille, France, a consor-
tium coordinated by GRTgaz, the gas transmission subsidiary of ENGIE,
has launched the Jupiter1000 project25 to compare two hydrogen produc-
tion technologies: proton exchange membrane (PEM) electrolysis and
alkaline electrolysis. The produced hydrogen will then either be mixed into
the natural gas grid or used to produce synthetic methane. In a second
project, GRHYD, ENGIE’s team is testing the injection of hydrogen in
a gas distribution grid (for residential heating uses) up to 20 percent.
Finally, ENGIE is working with the ammonia and fertilizer industry to
explore green hydrogen value chains in Chile. We believe in the promise
of this versatile molecule to not only bridge some of the shortcomings
23 Pflugmann, F., and De Blasio, N. (2020), “The Geopolitics of Renewable Hydrogen in Low Car- bon
Energy Markets” Geopolitics, History, and International Relations 12(1): 9–44 doi:
GHIR12120201.
24 Ibid.
25 Jupiter1000 (2018), “Jupiter1000: First industrial demonstrator of power to gas in France” https://
accessed June 29, 2020.
of renewables but also to play a central role in paving the path toward a
low-carbon energy future. ENGIE’s variety of projects in both geography
and scope reveals its seriousness and commitment to decarbonization
efforts. We support studying these real-world applications of hydrogen
technology through pilot projects and encourage ENGIE to consider how
these might complement its venture capital investment strategy.
We hope that by analyzing how companies like ENGIE approach inno-
vation, innovators might find new opportunities for collaboration. To
decarbonize our energy systems, a variety of stakeholders will need to
cooperate across the value chain. Ultimately, innovation will need to lead
to new products and services that can sustainably support a robust energy
market. Continuous research and development is required to ensure that
hydrogen technologies are technically improved, highly efficient, and as
competitive as possible. In the next section, we offer recommendations
to ENGIE on how it can better support and accelerate innovations in the
transition to a low-carbon energy future.
Recommendations for ENGIE
ENGIE could take a more direct approach to leverage its market and tech-
nological knowledge by further developing partnerships with research
universities. As Krishnamoorthy notes, businesses and universities have
had remarkable success partnering to confront the COVID-19 pandemic.
ENGIE can similarly direct more research funds and create scholarships to
spur early innovation in academia as a complement to its venture capital
strategy. Moreover, ENGIE could expand its internship opportunities, not
only in research and innovation roles but also in more managerial settings
to further spark a valuable intergenerational dialogue.
While ENGIE has not traditionally focused on basic research, the organi-
zation could easily develop the required skills, and thus better leverage its
external partnerships. Furthermore, ENGIE should increase its coopera-
tion with innovators and developers on specific projects, thus sharing its
expertise with far more teams than the VC model supports. ENGIE could
make a difference in accelerating the transition as it has the credibility,
access, and proven track record to do so. ENGIE support would also go a
long way to help overcome barriers by incumbent stakeholders. We think
the lessons learned from real-world applications will be instrumental for
creating new markets.
Additionally, ENGIE should continue fostering industry collaboration to
advance new technologies. This could be done more deliberately, as well as
organically. Goals could be publicly stated, and criteria made clear for how
to participate and what is to be achieved by specific deadlines. ENGIE
could convene an internal task force to vet its existing intellectual prop-
erty in order to discover untapped opportunities from which the industry
would collectively benefit. Moreover, as a leader in the transition, ENGIE
could better leverage its convening power among peers and other stake-
holders. Communication and outreach will be key, but while ENGIE has
numerous partnerships and sponsorships, its website only lists a handful
and does not offer clear indications of the
Keeping in mind the needs of developing markets will also be key to
achieving a low-carbon future. The developing world has a rapidly growing
energy demand that still relies heavily on fossil fuels. These countries must
balance their desire to industrialize and electrify with the responsibility of
addressing climate change, and innovation will again be key. ENGIE’s his-
toric footprint across 70 countries implies a unique perspective and voice
to make a difference. Hence, ENGIE should increase its focus on inno-
vative distributed and off-grid energy solutions in rural and developing
country contexts. ENGIE New Ventures should play an active role in sup-
porting budding companies in developing countries. We commend ENGIE
for leveraging its identity as a French company to support francophone
countries, especially in Africa. Finally, as Krishnamoorthy notes, the abil-
ity to raise capital and make investments in these locations, especially in
demonstration and deployment stages, will also help to create the needed
market demand.
26 ENGIE (2020), “Sponsoring and Partnerships” nerships,
accessed June 29, 2020.
The Role of Policy and Regulation in
Supporting Green Innovation
Entrepreneurs, economists, environmentalists, and business leaders agree
that appropriate policy and regulatory frameworks are necessary to sup-
port the transition to a low-carbon future. In the absence of active public
intervention in shaping energy systems to encourage decarbonization,
there are numerous market failures that prevent the socially optimal
outcome of greater decarbonization. Most obviously, the negative exter-
nality of carbon emissions is borne by the entire society rather than being
addressed at the source by energy companies. 27 Furthermore, relying
exclusively on private research and development often proves insufficient;
because successful technological innovation eventually becomes a public
good, there is often insufficient incentive for private companies to invest
in R&D at the level global society requires to avoid the worst impacts of
climate change. 28 As has been seen with renewables, early support can
help industries progress rapidly on the cost curve. Finally, the tendency to
overvalue short-term payoffs jeopardizes future wellbeing for the sake of
immediate
Policymakers must address the right levers to effectively promote environ-
mental sustainability; involving the business community can be helpful
in developing the needed cross-cutting support to make regulations and
market incentives effective and durable. Companies like ENGIE can speak
to what has worked in the past and where the gaps remain for policymak-
ers to fill so that they can competitively pursue decarbonization. Given the
complexity of these market failures, Krishnamoorthy underscored that it
will take several diverse and targeted approaches to accomplish the tran-
sition rather than a single panacea. Understanding business needs is even
more important today as governments look to stimulate the economy in
the wake of the COVID-19 pandemic.
27 Stavins, R. (2019), “The Future of . Carbon-Pricing Policy” National Bureau of Economic Re- search.
28 Ibid.
29 Summers, L. and Zeckhauser, R. (2008) “Policymaking for Posterity” Journal of Risk and Uncertain- ty 37, 2–3
doi:
Below, we examine three notable policy approaches that Krishnamoor-
thy identifies as supportive of the transition to a decarbonized economy.
Each of these helps to solve the above-mentioned market failures: a price
on carbon addresses the negative externality created by carbon emissions;
subsidizing sustainability programs encourages critical research and devel-
opment in nascent industries; and creating long-term market opportunities
for hydrogen overcomes a narrow mindset of immediate returns based on
business as usual practices.
Pricing Carbon
A well-designed economy-wide price on carbon can efficiently incentivize
the transition to a low-carbon economy. Understanding how companies
are considering the cost of carbon can be helpful to policymakers as they
design and advocate for carbon pricing policies. In fact, Krishnamoorthy
explained that ENGIE has been using an internal price of carbon for over a
decade, and it has proven an important consideration among a diverse set
of investment risk variables.
Many policymakers hotly debate a carbon tax versus a cap-and-trade pro-
gram when designing their policies. As noted by Krishnamoorthy, some
economists consider a carbon tax more business-friendly for driving down
emissions because businesses can rely on price stability. 30 A cap-and-trade
program, on the other hand, limits the amount of emissions, but can have
wide price volatility, as indeed occurs at times in the European Union’s
Emissions Trading System (EU ETS).31 However, as Krishnamoorthy
indicated, we agree that settling on any policy is preferable to quibbling
over the specifics of the policy. Having a policy in place is most important
since it indicates that the government considers decarbonization a priority,
which attracts investment in environmental technologies.
30 Pizer, W. (1997), “Prices vs. Quantities Revisited: The Case of Climate Change” Resources for the Future.
31 Pahle M. and Tietjen, O. (2019), “The Coalition for an EU-ETS Carbon Price Floor Is Reaching Critical
Mass” Energy Post reaching-critical-
mass/ accessed June 10, 2020.
Krishnamoorthy also indicated that business leaders cannot count with
much certainty on the specific carbon prices set by regulators. Given how
legislation can be regularly updated and amended, prices are not set in
stone. Therefore, unless policymakers can sufficiently guarantee businesses
some certainty of a policy’s permanence, there is no particular advantage to
the supposed price certainty of a carbon tax over, for instance, a cap-and-
trade system.
However, the current low price on carbon encourages firms to continue to
invest in long-term carbon-producing assets that will continue to func-
tion even as carbon prices climb in the future, precluding new fossil-fuel
infrastructure investment. Therefore, it is critical that carbon prices rise
sooner rather than later. Indeed, Krishnamoorthy noted that the EU ETS
should be stricter, driving down emissions and further incentivizing decar-
bonization. This is an encouraging statement, and we support ENGIE’s
recommendation for higher prices on carbon than the EU ETS market
currently dictates. ENGIE’s 2016 press release recommending “a significant
increase in CO2 prices”32 was a positive step, and we strongly encourage
the company to press this recommendation forward now by providing sug-
gestions to the EU ETS that would accelerate the transition to a low-carbon
economy.
Economists are clear that given the relatively steep marginal cost curve and
the relatively flat marginal benefit curve for abatement of carbon emissions,
a tax is more efficient than a permit system for reducing GHG emissions
(Figure 3).
32 ENGIE (2016), “European Energy Companies Urge EU Policymakers to Take Action for a Robust Carbon
Price Signal on the European Carbon Market” energy-companies-
urge-eu-policymakers-to-take-action-for-a-robust-carbon-price-signal-on-the- european-carbon-market-
accessed June 19, 2020.
Figure 3: Deadweight Loss of Tax Versus Permits, Source: Pizer, “Prices vs.
Quantities Revisited: The Case of Climate Change”
However, it has also been noted that a hybrid system can approach or even
exceed the efficiency of a pure A hybrid system adds a price collar to
the permit system, which restricts the price from going too high or falling
too low. This promotes the overall efficiency of the system. It ensures that
society neither pays an exorbitant price to mitigate the pollution, nor fails
to reduce emissions significantly, should mitigation prove cheaper than
expected. Based on this economic theory and given Engie’s recommendation
that the carbon price be higher, we recommend that the company actively
advocate for a price collar. This is especially critical in the wake of COVID-
19, when carbon prices per ton collapsed to € To address this and future
price craters, given that economists estimate the social cost of carbon as more
than €45,35 we recommend that a sensitivity analysis be conducted at various
price floors. Ultimately finding the correct floor price ensures that
persistently low prices for the ETS will not slow stakeholders’ willingness to
invest in the necessary technologies for a carbon-neutral future.
33 Pizer, W. (1997), “Prices vs. Quantities Revisited: The Case of Climate Change” Resources for the Future.
34 Global Data Energy (2020), “Coronavirus (Covid-19) Impact and EU Carbon Pricing” https://www. power-
accessed June 15, 2020.
35 Environmental Defense Fund “The True Cost of Carbon Pollution” true-
cost-carbon-pollution accessed June 26, 2020.
In addition to the price collar, ENGIE should advocate to keep a high per-
centage of permits eligible for the market stability reserve (MSR), which
banks excess permits when the price per permit falls too low. In fact, the
EU ETS permit price rebounded quickly after COVID due to the MSR.
However, while the MSR is currently set at 24 percent of the total number
of allowances in circulation, it is scheduled to decrease to just 12 percent
in 2023. We recommend that ENGIE advocate that the MSR remain at 24
percent or increase after 2023, and not revert to 12 percent.
Supporting Biofuels and Energy Efficiency
When we asked Krishnamoorthy what regulatory framework would best
support ENGIE’s decarbonization efforts, he focused his response on two
areas of government subsidy: energy efficiency and biogas. We agree with
his general recommendation that governments should support emerg-
ing technologies to accelerate decarbonization, and we see the stimulus
response to COVID-19 as an excellent opportunity for the French govern-
ment and the EU to spur investments in green technologies. ENGIE should
use the prospect of economic stimulus and job creation to advocate for
strong incentives for green solutions in the next round of stimulus.
We support the specific focus on energy efficiency as well. Krishnamoorthy
noted that “efficiency is core to our business,” and he suggested govern-
ment programs that would provide credit for energy efficiency upgrades
or more stringent building codes. Energy efficiency is a critical component
of decarbonization. Innovation in the area of energy efficiency is much
needed to support the integration of large amounts of intermittent genera-
tion. Smart meters and smart home applications will not only help to save
energy, but also enable small-scale demand response. Intelligent charging
tariffs for electric vehicles and heat pumps will also be crucial to support
rather than burden the electricity grid.
On the other hand, we view Krishnamoorthy’s suggestion of subsidies for
biogas with greater skepticism. Specifically, Krishnamoorthy suggested that
if the French government invested €30 per MWh to subsidize the com-
mercialization of biogas, this would be good for the environment while
also driving down biogas production costs dramatically, just as happened
for wind and solar technologies. This advocacy is unsurprising, given that
ENGIE has invested in three biogas generation technologies, including an
approach using pyro gasification of solid biomass that is expected to reach
“industrial scale” sometime in the coming In fact, just ten days
after our call, ENGIE announced a partnership with Mirova to “boost the
biomethane sector in France.”37
Current biogas tariffs in France are between €90 and €95 per MWh, three
to four times the cost of natural gas,38 and at least €30 more than the most
recent solar Generally speaking, society benefits when the cheap-
est technologies succeed in order to keep transition costs down. Therefore,
subsidies should be technology neutral and oriented around CO2 abatement,
regardless of how this is achieved. This goal is best accomplished through
auctions rather than feed-in tariffs. Of course, for nascent industries, with
good chances of succeeding and proving critical to the energy transition, such
as offshore wind or hydrogen, higher subsidies are justifiable.
It is an open question as to whether biogas falls into that category. True, biogas
is storable and dispatchable and therefore more valuable to the system. But
this value should be reflected by market mechanisms through the revenues
biogas creates when selling electricity during “expensive” hours—when the
use to the system is large. Where biogas is nonetheless the more expensive
technology, other sources of generation should be used.
Furthermore, while Krishnamoorthy suggested that biogas investments
have generally not received government subsidies and tax credits in the
same way that solar and wind have, this is not the case everywhere. Com-
panies in Denmark, Germany, and Italy enjoyed feed-in tariffs for biogas
production and directly supported biogas infrastructure build-out going
36 ENGIE (2020), ”Biogas.”
com/en/activities/renewable-energies/biogas accessed June 5, 2020.
37 ENGIE (2020), “ENGIE and Mirova Form a Unique Partnership to Boost the Biomethane Sector in
France” accessed June 5, 2020.
38 De Clercq, G. (2019) “France Makes Biogas Support Conditional on Cutting Costs” Reuters https://
ting-
costs-idUSKCN1PK0E6 accessed June 5, 2020.
39 Willuhn, M. (2019), “Portugal Solar Auction Reportedly Attracts €20/MWh Bids” PV Magazine
International tracts-e20-
mwh-bids/ accessed June 5, 2020.
back to 2008 and However, the industry has remained reliant on
such programs, and as government support has started to be rolled back
in those countries, biogas investments have France, on the other
hand, has tied its support of biofuels to price reduction thresholds that may
simply be out of reach for this technological approach.
Additionally, the environmental and social impacts of biogas are nuanced:
whereas biogas from waste or plant residues clearly has positive impacts
for climate and the environment, the experience with dedicated fuel crops
has been mixed. We see significant concerns around land use competition,
deforestation for fuel crops, and the impact on ecosystems of monocul-
tures, especially when looking beyond
Finally we concur with researchers at Ghent University that likely the best
market for biogas is as raw materials for green petrochemicals rather than
as a natural gas We are also skeptical of large government sub-
sidies with uncertain time horizons on the promise that a next-generation
technology, such as biogas from micro-algae, will become price competi-
tive. In fact, hundreds of millions of venture capital dollars were spent on
efforts to make biofuels from algae in the US44 without success. Therefore,
we are not convinced that specific biogas subsidies are the best focus of
ENGIE’s policy advocacy.
Designing Policies for Hydrogen
Designing the right set of policies is crucial to create demand and reduce
investment risk. By bearing some of the risks, governments cost-sharing in
the development of the technology. By developing markets, governments
40 Eyl-Mazzega, M. and Mathieu C. (2019), “Biogas and Biomethane in Europe: Denmark, Germany, Italy Lead”
Energy Post ny-italy-lead/ accessed
June 10, 2020.
41 Ibid.
42 Kenneth Richter, “Is the EU about to Re-Run the Biofuels Disaster with Biogas?—EUbioenergy,”
EUbioenergy, October 12, 2018, saster-
biogas/.
43 Ghent University, “Biogas Does Not Need Subsidies,” (blog), May 30, 2018, https://phys.
org/news/.
44 Eric Wesoff, “Hard Lessons from the Great Algae Biofuel Bubble,” Greentech Media (blog), April 19, 2017,
bring stability to a nascent industry and can spur both demand and supply.
Below is a list of policy schemes that governments could pursue to support
hydrogen development and deployment at scale. No one of these is a silver
bullet and it is likely that a combination of these policies will be needed to
serve an individual country’s unique constraints and reward stakeholders.
Cost-sharing policies serve as subsidies to help mitigate investment risk.
• Issue grants for research and development (R&D) focusing on
building hydrogen capacity: High priority R&D topics should
include capital intensive projects, such as lowering electrolyzers
costs and developing new membrane technologies.
• Provide equity or debt investment funds: Governments can
help to de-risk and stabilize projects by taking a position in the
capital stack. Like most infrastructure projects, building hydrogen
infrastructure bears risks, like counter-party non-payment, market
fluctuations, treasury rate price volatility, regulation changes, and
permitting delays.
• Subsidize per-unit production costs: The scheme hedges the price
of hydrogen by establishing a floor price. One way to structure
this subsidy is by setting a euro or dollar value per kilogram of
hydrogen produced.
• Offer tax credits: The policy supports investment by allowing
developers and investors to deduct costs from their tax liability dol-
Tax credits can be based on the amount of capital
invested or on units of hydrogen produced.
• Allowing accelerated depreciation: The policy is another measure
to help reduce tax liabilities. Instead of following a straight-line
depreciation method for federal income tax purposes, special pro-
visions are made in the tax code to allow for deductions to be made
in the first few years of the asset’s useful This is particularly
attractive to investors in energy infrastructure, as assets can have a
several-decades-long useful life. Being able to reduce the tax basis
45 Kagan, J. (2020) “Energy Tax Credit” Investopedia gy-tax-
accessed June 13, 2020.
46 Ibid.
upfront helps mitigate risks associated with holding the investment
long-term. For example, the US Modified Accelerated Cost Recov-
ery System (MACRS) program allows for solar energy assets to be
depreciated over five
Market-building policies range from regulating that hydrogen be blended
into the gas grids to creating direct purchasing schemes.
• Blending hydrogen into gas pipelines by mandatory quotas:
The regulation helps to create a market for hydrogen by forcing
demand. According to experts, around 5-20 percent can safely be
blended into existing natural gas pipelines without any upgrades or
adjustments to the Per Krishnamoorthy, in France ENGIE
can achieve up to 20 percent blending with minimal to no adjust-
ment. This policy alone can spur multibillion-dollar investments as
developers and investors will work to fulfill the created demand.
• Mandating that gas utilities issue purchase agreements for green
hydrogen: There are a variety of mechanisms by which these con-
tracts can be issued, including tenders, feed-in-tariffs, and bilateral
agreements.
Sample legislation has been included in the appendix to illustrate how a
collection of these policies might be used in the US context to support the
hydrogen economy. The approach may not be the most straightforward
globally, but has been designed to take US political and historical consider-
ations in mind. It draws on the Renewable Fuel Standard Program that was
developed to support the production of ethanol and its blending into gaso-
It also draws from the successes of renewables as seen in the tax credit
and accelerated depreciation provisions. Both of these latter measures are
specifically aimed at spurring private investment. As companies like ENGIE
consider where to launch additional hydrogen projects, a careful understand-
ing and advocating for the right policies will help to develop new business
practices that can accelerate the transition to a low-carbon economy.
47 Department of the Treasury (2020), “Publication 946: How To Depreciate Property (For Use Prepar- ing 2019
Returns)” accessed June 13, 2020.
48 IEA (2019), “The Future of Hydrogen”.
49 US Environmental Protection Agency (2015), “Renewable Fuel Standard Program” https://www.
accessed June 3, 2020.
Recommendations for ENGIE
In advocating for these policy mechanisms, ENGIE should further lever-
age this coming period of stimulus packages to earn considerably greater
support for green hydrogen technologies, as well as energy efficiency. Such
regulatory support will drive job growth and establish a competitive edge in
the coming decade in these critical emerging fields. Additionally, in order
to gain greater certainty of future carbon prices in the EU, we suggest that
ENGIE and other stakeholders advocate for a price floor and price ceiling
for the EU ETS as well as a marginal stability reserve of at least 24 percent.
A price collar will reduce price volatility while enabling the suc- cess of
enhanced decarbonization efforts. Finally, as countries consider new
policies to be put into place to support the hydrogen economy, ENGIE can
help the dialogue by sharing what they have learned from their hydro- gen
blending projects and playing an active role in public advocacy.
Building and Enhancing Shareholder
Support for the Transition
In addition to innovation and enabling regulation, transitioning to a
low-carbon business model will require shareholder buy-in. Krishna-
moorthy highlighted how contingent success is upon a CEO’s ability
to convince shareholders of the longer-term financial advantages of
implementing this transition. This past February, ENGIE had to face the
challenge when ENGIE’s Board removed CEO Isabelle Kocher, who had
made environmental sustainability a cornerstone of her corporate strat-
Communicating the business case for the transition is incredibly
straightforward if government regulation supports the needed investments.
However, when regulation is absent or uncertain, as it has been for the past
several decades, convincing shareholders to invest in sustainability may be
challenging.
Fortunately, shareholder perspectives are beginning to shift toward plac-
ing a deeper value on environmental sustainability. Across the globe,
50 Mallet, B. and Rose, M. (2020) “French Energy Group Engie Ousts CEO Isabelle Kocher” Reuters
accessed June 19, 2020.
shareholders are citing environmental sustainability as a key investment
consideration51 and calling for financial institutions such as Barclays52
and Commonwealth Bank53 to divest from fossil fuels. As a result, it will
hopefully be less necessary for companies to convince investors about the
need for the transition and more critical to demonstrate progress toward
environmental goals. We believe that this trend presents an opportunity for
ENGIE, a leader in the environmental transition, to differentiate itself by
highlighting its achievements through more extensive quantitative report-
ing. In the following section, we explore these recent trends and propose
ways for ENGIE to more effectively showcase its environmental work to
shareholders.
Shareholder Interest in Environmental Investments
In recent years, investors have increasingly begun to consider environmen-
tal sustainability in their decisions. This is highlighted by the significant
growth in buy-in for the UN-backed Principles for Sustainable Investment
(PRI). From 2006 to 2019, the number of investors who had signed on
to the PRI rose from 63 to 1,715 companies, with an associated increase
in assets under management from $ trillion to $ Fur-
thermore, in his 2020 letter to CEOs, Larry Fink, Chair and CEO of
Blackrock, the world’s largest asset manager, argued that “sustainabil-
ity- and climate-integrated portfolios can provide better risk-adjusted
returns to investors.”55 In his speech at Davos 2020, Mr. Fink expressed
surprise that, at least in private conversations with clients, they were “99:1
in favor” of his letter emphasizing the need for increased consideration of
51 Eccles, R. and Klimenko, S. (2019) “The Investor Revolution” Harvard Business Review https://hbr.
org/2019/05/the-investor-revolution accessed June 1, 2020.
52 Chapman, B. (2020), “Shareholders Call on Barclays to End Fossil Fuel Investment in Landmark Climate
Crisis Resolution” Independent barclays-bank-
accessed June 2, 2020.
53 Smee, B. (2020), “Commonwealth Bank Activist Shareholders Call out Company for Financing New
Gas Projects” The Guardian wealth-bank-
activist-shareholders-call-out-company-for-financing-new-gas-projects accessed June 29, 2020.
54 Eccles, R. and Klimenko, S. (2019), “The Investor Revolution” Harvard Business Review https://hbr.
org/2019/05/the-investor-revolution accessed June 1, 2020.
55 Fink, L. (2020), “Larry Fink’s Letter to CEOs” BlackRock
investor-relations/larry-fink-ceo-letter accessed June 3, 2020.
climate-related financial Hopefully, this shift in investor sentiment
will make it easier for companies like ENGIE to convince shareholders of
the longer-term benefits of environmental investment, allowing companies
to make short-term tradeoffs to mitigate longer-term environmental and
financial risks.
As Krishnamoorthy mentions, the COVID-19 pandemic may accelerate
the growth of shareholder interest in environmental investments. In light
of the pandemic, many leaders and journalists are calling for a similar
focus on the climate threat to prevent a future crisis of equal or greater
While some environmental advocates feared citizens would
de-prioritize climate due to the all-consuming threat of COVID-19, recent
polling suggests that concern about climate change remains a top priority
for the majority of According to an April 2020 survey, 66
percent of Americans reported being “very” or “somewhat” worried about
global warming, up from 62 percent in April Increasing public
concern about environmental sustainability, coupled with low fossil fuel
demand, may further persuade shareholders to support an accelerated
transition to a low-carbon economy. In line with this trend, Krishnamoor-
thy believes ENGIE should seize the moment to push for business model
innovations that advance the climate agenda.
Communicating Environmental Progress to Shareholders
As more shareholders adopt a climate-conscious mindset, the burden
for companies will shift from justifying environmental investments to
explaining their strategy and demonstrating their commitment through
quantitative metrics. According to a June 2019 article in the Harvard Busi-
ness Review, lack of high-quality data on sustainability metrics is one of
56 Meredith, S. (2020), “BlackRock’s Larry Fink Says He Feared a ‘severe Backlash’ for His Climate
Crisis Letter to CEOs” CNBC feared-
accessed June 4, 2020.
57 ENGIE (2020), “ENGIE 2019 Financial Results” Annual Report
resultats/2019 accessed June 4, 2020.
58 Schwartz, J. (2020), “Americans See Climate as a Concern, Even Amid Coronavirus Crisis,” The New York
Times accessed
June 10, 2020.
59 Leiserowitz, A., Maibach, E., and Rosenthal, S. (2020) “Climate Change in the American Mind” Yale
University and George Mason University mate-
change-in-the-american-mind-april-2020/ accessed June 1, 2020.
the greatest limitations to environmentally based Though
there have been several initiatives to create impact-related progress met-
rics, such as the Global Reporting Initiative (GRI), the Sustainability
Accounting Standards Board (SASB), and the Carbon Disclosure Proj-
ect (CDP), company-reported environmental metrics remain scarce and
One of the most widely used frameworks for tracking corporate social
responsibility is the UN Sustainable Development Goals (SGDs). The SDGs
consist of 17 priorities to improve society at large, including “taking urgent
action to combat climate change” (SDG 13).62 While more companies
are tracking their performance against SDGs, it is often done inconsis-
tently and anecdotally. According to PWC’s 2019 annual report exploring
over one thousand companies’ SDG reporting, 72 percent of companies
surveyed mentioned SDGs in their reporting publications, but only one
percent reported quantitative measures to show progress toward SDG-re-
lated Historically, simply having environmental language in
one’s report was sufficient to signal environmental consciousness, but as
investors increasingly prioritize sustainability in their financial decisions,
they will want to see more consistent and trackable metrics against which
to measure companies. Reporting extensive quantitative environmental
metrics is an area where ENGIE can differentiate itself from competitors by
highlighting its environmental returns on investment in a consistent and
easy to track way for shareholders.
ENGIE has produced several reports showcasing its environmental sustain-
ability work, including its “2020 Integrated Report”64 and a section on New
Corporate Social Responsibility Objectives in its 2019 annual financial
60 Eccles, R. and Klimenko, S. (2019), “The Investor Revolution” Harvard Business Review https://hbr.
org/2019/05/the-investor-revolution accessed June 1, 2020.
61 Norton, L. (2019), “How to Parse All the Metrics of Sustainability” Barrons -
ty-
51561159677 accessed June 4, 2020.
62 United Nations Sustainable Development (2016) “About the Sustainable Development Goals”
accessed June 15, 2020.
63 Scott, L. and McGill, A. (2019) “SDG Challenge 2019” PWC
sustainability/sustainable-development-goals/ accessed June 15,2020.
64 ENGIE (2020), “2020 Integrated Report” accessed
June 15, 2020.
reporting,65 but none of these reports showcases ENGIE’s environmental
progress in an extensive quantifiable way. Going forward, ENGIE should
help ensure that shareholders better understand and appreciate its climate
work by increasing the number, consistency, and clarity of its key climate
metrics in all financial reporting. Rather than stating just one or two goals,
ENGIE should incorporate tables of consistent environmental reporting
into its annual and quarterly reports so that shareholders can track the
company’s progress and performance as compared with its peers. Notably,
in the 2019 annual report press release, ENGIE announced a quantitative
goal to achieve a reduction in greenhouse gas from electricity production
from 149 CO2 equivalent metric tons in 2016 to 43 metric tons by
We recommend incorporating this metric into a broader suite of metrics,
which could showcase the holistic social impact of ENGIE’s environmental
investments. Given that the industry has yet to align on such metrics, this is
an opportunity for ENGIE to develop and present those that showcase its
strengths and leadership.
The importance of metrics is more than just “greenwashing” the corporate
report. By setting ambitious quantitative goals and tracking its progress,
ENGIE can begin to foster numbers-based debate in boardrooms on the
tradeoffs between financial returns and social impact and place pressure on
others in the industry to take more ambitious environmental action.
Recommendations for ENGIE
In summary, ENGIE should capitalize on the increased investor interest
in environmental sustainability (in particular in the wake of the COVID-
19 pandemic) to push for an accelerated environmental transformation,
leveraging the innovation opportunities previously discussed. Addition-
ally, ENGIE should highlight its sustainability achievements to investors
by developing quantitative metrics to track environmental progress and
displaying them prominently and consistently in quarterly and annual
65 ENGIE (2020), “ENGIE 2019 Financial Results” Annual Report
resultats/2019 accessed June 4, 2020.
66 Ibid.
reporting. This will help foster investor interest in ENGIE’s environmen-
tal investments and illustrate the returns of these investments. As ENGIE
develops these metrics, it should automate environmental metric tracking
as part of the company’s overall financial reporting to minimize cost and
ensure it is well-integrated with existing reporting processes. Finally, the
company should work with financial leaders to standardize environmental
metrics across the industry so shareholders can track ENGIE’s environ-
mental performance as compared to its peers.
Analysis: Summary &
Recommendations
ENGIE has made significant progress transitioning to a low-carbon business
model and should continue prioritizing environmental sustainability in order
to remain an industry leader in this space. Some of the ways it can do so are
as follows:
Continue to invest in the development and deployment of innovative
low-carbon technologies and efficiency measures:
• Work with research universities to develop grant programs and
scholarships for students developing innovative solutions for the
low-carbon energy transition.
• Develop additional pilot projects with developers and innovators as
a complement to the ENGIE New Ventures strategy, while offering
credibility, access, and expertise.
• Look for opportunities to collaborate with peers on technology
development and consider how innovation and associated patents
might better serve the industry holistically.
• Develop solutions, like distributed energy systems or low-cost
financing, to support developing nations.
Work with regulators and policymakers to implement regulation that
incentivizes low carbon innovation and nurtures a hydrogen economy:
• Use the COVID-19 stimulus packages to earn considerably
greater support for green hydrogen technologies as well as energy
efficiency.
• Conduct a sensitivity analysis of various carbon price floors to
maximize investment.
• Advocate that the current marginal stability reserve of 24 percent
continues past 2023.
• Share operational lessons learned from hydrogen-blending projects.
• Continue public advocacy for a hydrogen economy.
Improve reporting on environmental progress to better capitalize on new-
found public support for sustainability and highlight ENGIE’s industry
leadership in this area:
• Seize the current opportunity presented by the COVID-19 pan-
demic to push for accelerated environmental transformation.
• Develop quantitative metrics to track environmental progress and
display them prominently and consistently in quarterly and annual
reporting to highlight environmental returns on investment for
shareholders.
• Automate environmental metrics tracking as part of overall finan-
cial reporting by establishing clear data pipelines and dashboards
to minimize cost and ensure it is integrated with other reported
quantitative metrics.
• Work with financial leaders to standardize environmental metrics
across the industry so that shareholders can track ENGIE’s environ-
mental performance as compared with its peers.
Interview Questions &
Responses: Transcript
What strategic path would you suggest a company like ENGIE take to
address the needs of its stakeholders while pushing for a transition to a
low-carbon economy?
Krishnamoorthy’s Response:
ENGIE is a good example of a large and complex company which has
been balancing both priorities. Historically, we owned many coal plants,
and we have had to spend the past five years transitioning away from coal.
Throughout this journey, we have simultaneously managed the following
priorities: communicating with stakeholders, leveraging our strengths,
carefully integrating the needed innovation, and identifying financial part-
ners with shared priorities.
In determining our stakeholder communication strategy, we prioritize two
key groups: our shareholders and our employees. Firstly, we emphasized
that at the end of our transition, we would look like a very different com-
pany. Highlighting this reality was critical to gain both groups’ buy-in to
the changes we were planning to make to our core business model. Sec-
ondly, we set forth clear goals grounded in the company’s financial realities
and shifting risk portfolio. We emphasized goals that were realistic and
addressed the financial concerns of our stakeholders, rather than focus-
ing on high-level concepts such as “decarbonization.” Many shareholders
agreed with our vision because they feared that the company would lose
value if it did not transition to lower-carbon practices, so in a way com-
munication with shareholders was easier than with employees. As for our
employees, since their lives depend upon their jobs, we had to be very
careful and it took us a long time to gain their full buy-in and support. We
took a top-down approach, beginning with the top tiers of management
and eventually spreading our message to the entire company, proving that
our decision to exit coal went hand-in-hand with care for all stakeholders.
Throughout this process, we had to be agile and continually adapt our mes-
sage as public sentiment and business realities continued to shift.
As we transformed our company, we focused considerably on how to
leverage our inherent strengths. In our case, one of our four key business
units, client solutions, was in a position to greatly benefit from a speedy
transition to decarbonization. Therefore, we focused on how to grow that
business throughout our transition.
In addition to leveraging our strengths, we recognized that innovation
would be key to reinvent ourselves and achieve our vision. We thoughtfully
identified a portfolio of needed changes and acquisitions and then pro-
ceeded to integrate them piece by piece into the company. We have avoided
making too many large acquisitions. Instead, we identified many small and
medium-sized acquisitions to accomplish our goals. Even with this inten-
tional approach, we had a steep managerial learning curve through the
middle of our transition because we had many new pieces that our manag-
ers had no experience with. We put a lot of emphasis on helping managers
learn about the new tasks and responsibilities required throughout this
process.
Finally, we focused on leveraging financing aimed at decarbonization proj-
ects. For example, we are the largest issuer of green bonds. Many of our
business models today are based on what we call DBSO, which stands for
Develop, Build, and partially Sell Out. We start from scratch, but don’t hold
the asset forever because there are other investors, some with lower capital
costs, who want to invest in projects that are green.
In your experience, do companies always get clear indications of what
shareholders expect? Additionally, do shareholders perceive a tradeoff
between profitability and going green?
Krishnamoorthy’s Response:
We see discussions with our shareholders as a two-way street; we want to
discover their preferences and at the same time guide them. We pitch them
our strategy, present the associated risks, and create an environment for
engagement. The reality is that the shareholders’ expectations change as a
function of the environment around them, so we do our best to get consen-
sus on our strategy while balancing their changing needs.
Sometimes shareholders do not like the short-term trade-offs when, for
example, we pull out of investments like coal and move toward a greener
business model. In these cases, we have to explain why we believe that,
although in the short term these investments do not guarantee the same
return levels, over time they will be much more profitable as consumers
continue to shift away from coal. It’s a lot of give and take because it’s very
hard to model these long-term returns across the entire portfolio. These
conversations often feel like a negotiation. Ultimately, you have to tell a
story that will stick and not change that story too often.
What role will innovation play in this transition and what technologies
do you think will be key?
Krishnamoorthy’s Response:
The energy transition, as can be seen with the withdrawal of the United
States from the Paris Climate Agreement, is still a debate. In a tril-
lion-dollar industry, there are many stakeholders, like major coal players,
who are still fighting for their share. How these competing interests will be
addressed remains to be seen.
What role does innovation play in this debate? It gives hope, to start, and
it gives a bit of strength to those companies who want to push in the direc-
tion of change. Change, after all, is driven by technology innovation, as we
can see from solar and wind technologies. Finally, innovation is a powerful
tool to reach carbon neutrality. In other words, innovation arms those who
want to change with the means to go against a rigid and long process, while
giving hope.
Innovation, however, is very expensive. After investing in 100 startups, two
of them might make some money. After investing in 10,000, maybe only
then you will find a winner. Innovation requires imagining something that
does not exist. Most of these efforts are not successful—something goes
wrong, and this is why it is so expensive.
The way to make innovation work better is through cooperation. It means
having the willingness to approach a competitor with a simple proposition:
to collaborate rather than both working separately on the same ineffective
idea. In ENGIE’s case, we do this often. For example, there is this company
called Heliatek, which is investing in organic photovoltaics. We are part-
nering with them even though they are a subsidiary of RWE, which is a big
competitor of ours. This is also happening in the electric vehicle industry.
Instead of Tesla setting up their own chargers everywhere, for instance, car
manufacturers are talking amongst themselves to create a shared network
of superchargers. Without this collaboration, there would be a phenomenal
amount of wasted resources. Imagine if General Motors and Ford each had
their own gas stations—this type of inefficiencies are especially problematic
with new technologies.
In terms of the technologies needed for the transition, it is helpful to focus
on those related to human-made anthropogenic CO2 emissions. Everybody
understands and accepts that renewables are here to stay, forever. They will
continue to grow and evolve—whether it is batteries, artificial intelligence
to manage intermittent power, supply and demand, or the absence of iner-
tia on the grid. Essentially, these are one big technology that will play a
prominent role. Over the last ten years at least, people have begun talking
about renewables as if they can solve all the problems on Earth. However,
we do not believe electricity can fix everything; we will need other technol-
ogies beyond renewables.
One technology we are particularly excited about is renewable or green
hydrogen because it is the cleanest one. Moreover, it has a lot of charac-
teristics that renewables do not have. In time, the two will coexist. Today,
companies are moving into hydrogen more decisively than they did 15
years ago; more and more investments are going into building a hydrogen
economy.
Everything around electric mobility also must survive because hydrogen
does not currently have the needed level of fuel economy. Electric mobility
works and it has just started to improve like crazy. If you look at next year,
2021, there will be 15 different models of electric vehicles that can do 500+
kilometers. This is a drastic improvement from the 100+ kilometers which
were the standard two to three years ago. Again, I do not think this alone
will solve all the problems. For example, by converting all internal engine
vehicles to electric, you would save three to four gigatons of CO2. However,
there are 200 gigawatts of new coal-based electricity being built or recently
commissioned around the world, so coal will not just go away for the next
30 years.
These numbers clearly show that we will need technologies like carbon
capture, utilization, and storage (CCUS). We will have to capture and store
CO2—there is no alternative. Today, there are 17-18 CCUS plants. There
could be ~20,000 in the next 10 to 20 years.
Finally, marginally, there will be a need for biofuels, particularly in air
transportation. Air transporting has been deeply impacted by coronavi-
rus, and it will probably never fully recover from it. It will take a long time
for people to stop being scared of traveling, and this does not help the
industry. On top of this, there are environmentalists saying it is bad to fly,
regardless. The entire industry is suffering and will become smaller, but
biofuels could solve some of the transportation problems.
Overall, innovation will be key to accelerating the transition to a low-car-
bon economy, and I believe we need to focus on: renewables (including
green gas and green hydrogen), electric mobility, CCUS, and a bit of
biofuels.
Follow-Up Question:
When does a company like ENGIE start to look into these innovations
and act on them?
Krishnamoorthy’s Response:
At a company as big as ours, we have a process for everything. One of our
processes is called “Technology Watch.” It has been part of our innovation
scouting forever, so you could say that we have many people looking into
the future at all times. They monitor what is evolving and what is not, they
participate in conferences, meet companies and startups. At ENGIE, inno-
vation opportunities are tested and challenged in several ways until we
come to an internal agreement and if warranted, we put research money
into these ideas. We spend about 100 million euros every year in research
and technology. It is not billions like Intel or Google, but it is significant.
For example, today, we are working on “greening” natural gas. We are
launching pilots and will then develop demonstration plants. But we only
do this if our research activities have proven that these opportunities are
promising, and it might take a few years. We start by investing a few mil-
lion into a new idea, never tens of millions, and we will get a feel of it. Only
when we are convinced that we have a concrete chance at commercializa-
tion will we invest tens of millions.
Back to the process, internally we do not do that much fundamental
research, we operate by looking at the technology readiness level (TRL).
Today, we start looking at technologies with a TRL of two, three, or four,
but in the past, we were looking only at TRL seven. We take this approach
because we are not technology inventors per se. We are early users of risk-
ier technologies as a means to gain a foothold in industry sectors which are
rapidly changing.
After our teams look into “everything” on Earth, we have another pro-
cess by which we narrow down these technology opportunities. When we
finally find something that makes sense to invest in, it is usually because
these companies are different from us. If it is a startup, they can invent
technologies, but they cannot easily access markets or the knowhow
needed to deploy technologies at scale, and we can help.
After we invest, we try to secure preferred rights in Europe for a period of
time. We also want our team to sit on the board—people with, let us say, a
little bit more grey hair than the people in a startup. We introduce an ele-
ment of experience and global vision.
Overall, our process mostly involves scouting, researching, and investing
in startups. One or two of these startups eventually get it right, at which
point we try to acquire them. For example, we took a risk and acquired an
electric charging company that looked like it would only be a five percent
investment for us. Now we are the second largest electric charger company
in the world outside of China with 100,000+ chargers installed all over the
world.
We have invested 125 million euros in startups since 2014 via our cor-
porate venture capital fund ENGIE New Ventures. We focus on taking
positions in many different companies. Some will sink, but they are bal-
anced by the ones that succeed. If we can maintain the overall value of our
investments over time, even without a financial return, and at the same
time create additional strategic value, we consider it a decent result.
What regulatory framework in France or elsewhere would most support
ENGIE’s efforts to decarbonize its activities?
Krishnamoorthy’s Response:
As I mentioned before, electrification is not a panacea for all ills. You need
to look at something else as well, so our current conversations with reg-
ulators in the EU and France stress this need to support green solutions
outside of electricity. In France, for instance, we have a big presence as a
gas company (we own practically all of France’s transportation and dis-
tribution gas infrastructure) As we are convinced that green gas will play
a major role in the energy transition and beyond, we would like to see a
regulatory environment prevail in which, much as was done for renewables
such as solar and wind, the government provides support for pursuing
environmentally friendly solutions, such as industrializing biogas. Today,
you can supply natural gas in France at a cost of €50/MWh, but biogas is
more like €80/MWh, so nobody will buy it. As a result, you need state sup-
port, such as government subsidies, to make up the €30/MWh difference.
Additionally, we are pushing for regulatory support for improved effi-
ciency. Efficiency is indeed the first step towards a carbon-neutral society:
first you need to consume less energy, and then you can decarbonize the
remaining part. Different tools can help to improve the energy efficiency:
certificates that provide credit for a low-energy consumption, guidelines
for buildings, etc.
In its financial analysis and risk analysis, does ENGIE currently operate
with an assumed cost of carbon (aka “shadow cost of carbon”)? If so,
how are those calculated?
Krishnamoorthy’s Response:
We have worked to estimate the cost of carbon for over a decade (since
2007 or 2008). As a large company with ~€60 billion in revenues we deal
with a lot of uncertainties. To address these uncertainties, we have a pro-
cess that looks at every big variable (., electricity prices, foreign markets,
gas, etc.) and makes projections for how these will affect prices. We do the
same thing for carbon. As a company, we forecast carbon prices biannually.
Once we have approved them, we publish the numbers and use them for
our internal modeling.
Carbon price modelling is part of our overall forecasting, but even once
we have a number, we still debate the business implications on a case by
case basis. For example, about ten years ago when we started doing wind,
we looked into a 300-megawatt project in Morocco called Tarfaya, which
had been running for several years. We made a case that carbon prices
would go up and we should factor that into our evaluations. We had an
internal debate and acknowledged that there might be a case for that, but
it was risky, so if we accepted that risk, we would need to balance this risk
elsewhere. Ultimately, even though you have numbers for carbon prices
they need to be contextualized based upon all of the risks and uncertainties
you’re dealing with.
Follow-Up Question:
Would it be helpful and provide certainty if there were an econo-
my-wide price on carbon that was applied beyond the EU Emission
Trading System (ETS)?
Krishnamoorthy’s Response:
There needs to be a price on carbon, but the problem is that even where
there is a price, regulations often change. We were complaining a lot four
years ago when the price of carbon in Europe declined to 6-7€. Then, it
came back up; it increased to above 20€. But now because of coronavirus, it
dropped to 17€. So, it keeps going up and down, making investment deci-
sions more complex.
Overall, we think that the price of carbon is not high enough. But there
needs to be some price because even just having a price helps to inform
the decision-making process. At least you can say, “Yeah, I want to invest
there because they have some price on carbon and I believe that carbon has
to have a price.” The price itself might not provide much support, but you
might be more willing to have a solar project with a high merchant risk in a
country that at least believes in green.
How would you respond operationally if governments required, let’s
say a five percent blending of “green” hydrogen, into natural gas? What
technologies are you investing in? Would companies need to raise
prices?
Krishnamoorthy’s Response:
As many of our gas assets are in France, we can look there to contextualize
this question. French law today allows you to inject hydrogen into the nat-
ural gas grid, but there is a cap of six percent. We already have a couple of
projects today to test hydrogen uses.
The first project, called GRHYD, is near Dunkirk where we are producing
hydrogen to inject into the existing natural gas distribution network of
a new neighborhood, Le Petit Village, with hundreds of consumers. The
purpose of this test is to see the impact of hydrogen on end-use equipment
without any changes to the existing network. The project started at five
percent hydrogen, with the goal of getting to twenty percent in the coming
years.
The second project, Jupiter 1000, is near Marseille where we are producing
hydrogen using two different technologies: proton exchange membrane
(PEM) electrolysis and alkaline electrolysis. The produced hydrogen is then
either injected directly into the natural gas transportation grid or used to
produce synthetic methane, through a methanation process with carbon
dioxide. Our purpose is to test the transportation grid functionality when
either injecting hydrogen, synthetic methane, or both.
These pilot projects are in France, but what is important is that we are get-
ting experience that we can then translate to our global operations. The
major question is whether the transportation and distribution grids can
handle hydrogen up to twenty percent without requiring any modification
to the existing infrastructure. Then, there are also questions about end-use
equipment and when it will need to be changed. In Germany, hydrogen
trains are still being manufactured and running; they are starting to run in
France too. These are the early days with hydrogen.
Follow-Up Question:
Let us assume these projects will show that it is technologically feasible
and safe to go beyond five percent, could you comment on the process of
doing so and how could this work economically for companies?
Krishnamoorthy’s Response:
The problem today is the production of hydrogen in an economic way.
ENGIE is already in action to commercialize and industrialize renewable
hydrogen in many applications. In Australia, for example, we are work-
ing with the ammonia and fertilizer industry to jointly demonstrate that
renewable hydrogen could achieve the decarbonation of the ammonia
production today based on fossil hydrogen. Engaging in concrete projects
at industrial scale, in parallel to innovation, is key to trigger the virtuous
circle and reach competitiveness by 2030, as assumed by an international
consensus of experts.
At the same time, we should also consider today’s realities. Places like
Chile, Australia, and Saudi Arabia, where the prices of solar energy are
extraordinarily low, already have a competitive advantage. But I think that
right now we need to focus on making hydrogen much more economical,
by improving the electrolysis process itself. For example, we are investing in
a novel high temperature electrolysis process, but there are dozens of
companies all over the world investing hundreds of millions of dollars in
similar projects to make hydrogen economical over the next decade or two.
In terms of transitioning to a green energy sector, what are ENGIE’s
advantages compared to other utilities and/or oil and gas majors?
Krishnamoorthy’s Response:
I don’t think we have one particular strength that others don’t have, but we
have a unique combination of several factors.
First, as a utility we are much better positioned to raise debt than oil and
gas companies, because oil and gas is seen as a riskier industry. This results
in a lower cost of capital. Second, we are one of the only A-rated utilities,
which gives us an advantage over many other utilities when we borrow
money. Third, and more specific to us, we’re running many businesses
across many continents. Each business goes up and down a little bit, but
fluctuations within one unit don’t affect our whole portfolio. This diver-
sity helps keep us more flexible and enables us to make better decisions.
Although we don’t always recognize this as an important strength, it is one.
Additionally, we are a global company. Although historically we
