Nathan Hunt

In terms of time line, realistically, Nathan Hunt

Hi. This is the Seek & Prosper Interview Series from S&P Global. My name is Nathan Hunt. I am here today talking to Coralie Laurencin, the Senior Director, Power and Climate Policy Lead at S&P Global Commodity Insights. And our topic for today is the energy transition. Coralie, thank you so much for joining me.

Coralie Laurencin

Thank you for having me. It's a pleasure.

Nathan Hunt

So Coralie, we'll start with a little history. Way back in 2008, you talked about how one of the added benefits of renewables as an energy source is that they provide a security of supply. When you look at the current situation with energy markets in Europe in the context of Russia's invasion of Ukraine and the associated sanctions with everyone suddenly talking about energy security, are we finally at the point of appreciating this benefit?

Coralie Laurencin

The invasion of Ukraine by Russia has changed a lot of things for Europe. It's forced it to reconsider what its supply mix and the power market is. And it's really is pushing Europe in the direction of renewables. Now Europe was always going to go for renewables. That has been the chosen technology for Europe. And when I mean renewables, I'm referring to wind and solar.

But the urgency of the situation in Ukraine means that Europe now has to go forward much faster than it would have and that it also understands that relying on foreign imports for any source of energy is a risk. And we're seeing that beyond the situation today with Russia, right? Europe has a large consumption of gas, a large part of that comes from Russia. We're trying to replace it. So we're going to other suppliers, and we're telling them, could you get us some gas and let's discuss terms and conditions. And we're finding that we don't really see eye to eye on terms and conditions. It's not that straightforward.

So really, our problem isn't just that we have an unreliable supplier at the moment. Our problem is that we're aiming for a net zero power system, and it's really difficult to be sourcing gas from other people when that's the outcome.

how soon can Europe move in the direction of renewables, so that, that is more the majority of the energy sources?

Coralie Laurencin

Well, this is the big question mark, right? And the European Union, the commission specifically has said, we're about 20% plus of renewable energy, right? So that's energy from renewables and power and transport and in heat. Big number already. I think it's about twice what the U.S. dose. However, what European Commission is saying is, we need to go to 45, and we need to do that by 2030. So what we're being asked to do is to more than double the situation when we're in the next 8 or so years, very tall hurdle there. At the same time, that's 45%. It's not 100%. We're still a way away.

Now where this will be more important, where renewables will play a larger role is in the power sector. So really, there's the understanding in the power sector that renewables are very competitive from a cost perspective that they are increasingly reliable because we can mix them because we can use interconnections because we can have some form of storage. They're not perfectly reliable, and I'm sure you want to come back to that. But we can do more with renewables than we expected, and they do offer security of supply.

So when we run our outlook to 2030, we're thinking we're going to get to 60% plus of renewables in the power sector. And that's really a big, big number. It's a huge change.

Nathan Hunt

Nowadays, people tend to talk about energy transition versus energy security as if these were competing priorities. Would you agree that in the short term, at least, we are being forced to choose between security and transition?

Coralie Laurencin

Yes. I think that's a very fair statement. In the long term, Europe sees that these are 2 factors that we can reconcile, thanks to renewable energy. In the short term, realistically, if we want to get rid of all of these Russian gas imports that we have, we're going to have to increase our emissions.

And specifically, what we mean is we're going to have to look at what the coal plants can do, maybe with some oil-fired plants can do, there are no easy solutions. And we've seen that a couple of -- a few weeks ago, France have said, well, maybe there's this one coal plant we were going to close, let's not close it.

Yesterday, Germany said, well, maybe there's 10 gigawatts of thermal plants, most of them coal, some of them oil. Let's bring them back into the market if we have to. This is how we deliver security of supply.

In the short term, really, there's not a lot that Europe can do if Russia closes the tap. And that's the worrying perspective. Not only is energy extraordinarily high for consumers, but also we don't really know how to replace the stuff if it goes away overnight.

Nathan Hunt

Pricing carbon properly would seem to me to be unnecessary precondition for achieving anything against the Paris-aligned benchmarks. Is the market pricing carbon correctly today?

Coralie Laurencin

Those are some really great questions. I think if I can, I want to disagree slightly with the first part of that segment. In Europe, and this is different to what's going on in the U.S., but we've got a view that carbon is part of the toolbox that will get us to net zero emissions. But it is not the only way to skin a cat. And in Europe, we do have some really strong carbon pricing policies. We've got the emissions trading system, which is the European carbon price market for power and industry works really well. Prices are just below 100 tonnes, very strong market. But I would argue, and we've always argue that this is a market that does really well at telling a coal plant, you shouldn't be running, you should leave that space for someone who's emitting less, maybe it's gas, maybe it's nuclear. That market is doing well.

However, when you're an investor and you're thinking, I'd like to build a power plant. You're not really comfortable with the fact that the carbon market has got 2 years of a forward curve, maybe 3. That's not good enough if you want to invest. You're going to be spending a lot of money on an asset that's going to be around for 20, 30, maybe more years. Two years ahead of price visibility is not going to cut it.

So what we're seeing in power and what we've seen in power in the past, and we are now seeing in the industrial sector, which needs to clean up its act in Europe as an incentivized to do so in the ETS is that they are saying these power price -- these carbon prices are very, very strong, and we recognize their value, but we would like a long-term contract. We would like some kind of government guarantee. And this is where governments are stepping in and they're starting to say this is very new. This is emerging if we can say that. They're starting to say, "Well, we're going to give you a guarantee that if the carbon price isn't EUR 80 per tonne or EUR 90 per tonne, we'll match that will make you whole. And so you can proceed with your investment that's very expensive, and you need to amortize over decades.

So carbon signal is very important, but you need also to have that long-term visibility, which sometimes the carbon signals are policy-driven either markets or taxes don't give you that. But I would agree that the carbon signals are very important. We were talking earlier about electric vehicles. In London, you've got some taxes on ICE vehicles on sort of traditional old-fashioned vehicles, that's working really well. That's a huge incentives for people who drive taxis, for people who have Ubers to move away to electric vehicles, even for you and me. So that's working really well. There are some places where the carbon signal is not very strong.

And so that is some -- an area you were saying where is carbon not well priced. Carbon is not well priced in the heating market and heat is about 40% of Europe's energy demand. So it's a big chunk, and we're not addressing that from a climate change perspective. And there are various political reasons for that. It's a difficult market, it's a fragmented market. It's an end user market, right? You're not speaking to the big electricity providers. But that is an area where everything needs to be done. And possibly, it will be a mix of some carbon price, but potentially simply some incentives, right? Maybe not about just the sticks, some [ carrots ]

Nathan Hunt

You've described yourself in the past as an offset skeptic. What is it about carbon offsets that you have reservations with?

Coralie Laurencin

I think if you look at the offset idea, -- it's brilliant. It's a win-win, right? Instead of getting my -- we were talking about cement manufacturers. It's very difficult if you're a cement manufacturer to reduce your emissions. There are not that many options and all of them are expensive. So you're not in the best place, but you know you want to do something.

Well, perhaps instead of paying EUR 200, EUR 300 per tonne, you go to another geography and you say, "Let me help you reduce your emissions. It will make my contribution. It will net out my contribution, and I will get this at a lower cost. And possibly, there'll be some added development benefits because I'm doing this in developing countries.

So that's the rationale, and they've been around for a while, but they've never really worked in the sense that there isn't the sense as a buyer that you know exactly what you're buying. And in many cases, there's the suspicion that buyers are not buying what they think they're buying. So there's the question of the quality of the credits that you're buying. So are you sure you're reducing a tonne of carbon. And is it really a tonne? Or is it just a little bit less? What is it that you're paying for? What is it account? And then are you sure that if you haven't done anything, that tonne of carbon would have been emitted, would that forest have been cut, right? Would those trees not have been planted. So that's the concept of additionality. So these are a little bit the buzzwords and a lot of climate policies at the moment, right? You want to make sure that your climate policies are moving you towards the goal that you have in mind.

In the offset market, there's very little transparency of information. And it's all about how you monitor and you verify and how do you build the trust that the market is doing what it's saying, right, whether it be actions that deliver the carbon credits are doing what they're saying. There's a lot of questions about that.

I think that's my historical reservation. I think today, you have to -- there's another issue. We've got 90% of the emissions in the world that are in countries which have signed a net zero carbon agreement. So these are countries that have said, at some point in the future, we're going to reduce -- we will have no more emissions, and that's fine. So what is the place of offsets if nationally, 90% of the emissions are in countries where there should be no more emissions. And I think it's really interesting because there's one of these short-term long-term conundrums here. In the short term, the offset market is booming. Prices are rising. More people are interested, there's more appetite to be doing the right thing. In the long term, really, those actions to reduce emissions need to come closer to home because those reduction of emissions that are happening mostly in developing countries need to be claimed for their national development plans as part of UN commitments.

Nathan Hunt

Is natural gas, a part of the energy transition. I've heard it referred to as a bridge fuel in the past or is using natural gas a way of avoiding the difficult long-term decisions that need to be made to move towards a net zero energy source?

Coralie Laurencin

I think the short answer to that is it really depends who you ask on this earth, right? So my understanding is if you ask folks in the U.S., they'll tell you definitely natural gas is part of the transition. If you ask people in Europe right now, everyone will tell you, it is something that we need to move away from immediately. But a lot of that is because of what's going on in Ukraine. It's for security of supply concerns, and our understanding that actually when you think about your dependency and how much do you need to import from other countries, that might be a problem.

But in the past in Europe, really natural gas was a bridge fuel. We were going to go from coal to gas and then there will be a period where we would use gas for a long time as we got comfortable with the intermittency of renewables. Now we feel for security of supply, we've got to get comfortable faster.

Nathan Hunt

What about nuclear. It doesn't have the political popularity of wind and solar. And many European countries specifically seem to have turned their back on nuclear. Can we have an energy transition assuming current technology without nuclear power?

Coralie Laurencin

Well, again, it depends who you ask. In Europe, this is one of the tough questions that really divides Europe almost right down to the middle and people are very unwilling to change their minds. So you've got a whole number of countries in Europe, which are deeply antinuclear, for which nuclear has no place in a green society and nuclear must be closed quickly. And Germany is sort of the leader of this group.

And then on the other hand, you've got another group of countries possibly led by France, saying no, nuclear is a low-carbon technology. It's a technology we know. It's a baseload technology. We can make this work.

And interestingly, the situation in Ukraine has done nothing to improve the view of nuclear from those countries that don't like it very much. So nuclear is something that Europe has agreed to disagree on. So you've got half of Europe saying we will build reactors. We will increase our fleet. We will depend on nuclear. Increasingly, they're saying, well, we're not going to -- we're not going to work with Russia to do that, which is new, but still, we're going to go for nuclear. And you've got the other half of Europe that's saying, we need to close these things as fast as possible, and the solution is renewables and renewables only.

Nathan Hunt

So this feels very much like in these last 2 questions, natural gas and nuclear, that what we're looking at is more of a political question than perhaps a science-based question. Is the energy transition necessarily wrapped up in the politics of the industrialized countries that need to take this on?

Coralie Laurencin

Increasingly, and I think that's one of the big changes, since I started out looking at the power industry is. Power industry used to be a neighborhood thing, right. You produce locally and you consume locally. And that's less and less the case for various reasons. One of them is because we're going to use a lot of renewables to make hydrogen, for example. And then the hydrogen will decarbonize our industry, perhaps some part of the transport sector as well. So there are a lot of the issues and problematics of gas that are actually coming back into the power market. Also, as we're looking to decarbonize more and more, the role and the impetus of the state is much more important. And that's much more true in Europe than it is in the U.S. or elsewhere, but definitely, it's much more government managed than it's been.

Nathan Hunt

What role do you see for S&P Global commodity Insights in the energy transition. This is a company whose history is extremely strong in the fossil fuel era. So how do you see the company moving forward?

Coralie Laurencin

So I think we're -- we haven't yet turned the page of fossil fuels, and it's going to take a significant amount of time because you've got countries moving fast, maybe those are in Europe, you've got countries moving less fast, maybe those are developing countries. So oil and gas are going to be part of the picture for a very long time.

There is a transition that's ongoing, but it's not going to happen overnight. So I think that strength remains very important. What I would say is that as you look to the energy transition, we are in new sectors that are in desperate need of data and market transparency. And if you look at power, if you look at carbon, these are sectors where we don't have or the market doesn't have enough of the data, the insights, the metrics that can help us or help participants make the right decisions. Let me give you a few examples, right? So I was -- we're talking about offsets. Offset is definitely lack of transparency. There isn't really a market. A lot of it is over the counter. It's not really -- you can't -- you can trade them, but it's not very liquid. There's not much depth, there's not much long -- not many long-term products. All of that really needs to be organized in a way as the market grows. And I think that's where we can play a role.

And in Europe, but also in the U.S., what would be interesting as well is to develop some of this data and insights, for example, on the contracts that renewable developers signed with industrials or with the state or with utilities, what we call PPAs and how the role of guarantees of origin, how that market is being traded. So there's a lot, I think, that we can apply to this energy transition that will be hugely beneficial because you need more data and understanding of the market to create a market that's [ efficient ].

Nathan Hunt

What is the single biggest thing that needs to change in energy markets in order to achieve an energy transition?

Coralie Laurencin

In my view, the single biggest change that we need to deliver is behavioral, personal change. And this is -- I can see you're sort of lowering your shoulders there, "Oh, no, that's not easy. Exactly. That is not easy. This is a huge problem. You've got -- if you do a poll in any country and you say how concerned are you about climate change? How much do you want to be part of the solution? Do you want your country to lead the solution. Everyone is on board, right? Everyone is very concerned. Everyone wants to see change.

But politically, if you're a government and you start saying, "I'm going to put in a carbon market. I'm going to start to tax gas when it's used in the heating sector. You will not be reelected, simple as that. You like immediate penalty, you're going. So there is a disconnect between what people want and what they want for themselves. And we're at this point now where we actually need people to take one for the team, be collaborative and understand that it is those little progressive things that are going to make a difference. You can't heat your home at 25 degrees Celsius. You can't use your car if you're not driving very far. All of these little behavioral changes need to happen. And that's very difficult because that is hard to -- you can tax some things. But if there is no appetite for the tax, what's your incentive as an elected official to do it?

Nathan Hunt

Coralie, I was hoping for an easy answer, but I think we'll have to leave it there for today. Thank you so much for joining me.

Coralie Laurencin

Well, thank you. It's been really, really interesting.

Nathan Hunt

And thanks to all of you as well for joining us on this Seek & Prosper Interview Series.