KPMG ROMANIA SRL

  |  27.06.2013

Energy and Climate change – future business concerns

According to KPMG publication “Expect the Unexpected: Building business value in a changing world”, businesses today are operating in an ever more interconnected and globalized world. Supply chains stretch across continents and are vulnerable to disruption. Consumer demands and government policies are changing rapidly and will impact your bottom line if your business does not respond.

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Against this background of complexity we face a new set of challenges. For 20 years or more we have recognized that the way we do business has serious impacts on the world around us. Now it is increasingly clear that the state of the world around us affects the way we do business.

 

The above mentioned publication shows that population growth, exploitation of natural resources, climate change and other factors are putting the world on a development trajectory that is not sustainable. In other words, if we fail to alter our patterns of production and consumption, things will begin to go badly wrong. Intergovernmental treaties are yet to solve the issues and, at a national level, the transition to sustainable growth remains a goal rather than an achievement. The concept of “green growth” has gained ground but we still lack a precise understanding of how we can achieve it along with higher standards of living within the limits of our planet.

 

Corporations are, of course, not passive bystanders in any of this. The resources on which businesses rely will become more difficult to access and more costly. There will be increasing strain on infrastructure and natural systems as patterns of economic growth and wealth change. Physical assets and supply chains will be affected by the unpredictable results of a warming world. And businesses will be confronted with an ever more complex web of legislation and fiscal instruments.

 

But this is not the whole story. Consumer and investor values are changing. And as they change more corporations are recognizing that there is profit and opportunity in a broader sense of responsibility beyond the next quarter’s results. The bold, the visionary and the innovative recognize that what is good for people and the planet will also be good for the long term bottom line and shareholder value. Competitive advantage can be carved out of emerging risk.

 

In its report, KPMG presents a system of ten sustainability megaforces that will impact each and every business over the next 20 years.

 

Thus, businesses will be exposed to hundreds of environmental and social changes that could bring both risks and opportunities in the search for sustainable growth. First most important topics affecting the business over the next 20 years are “energy and fuel” and “climate change”.

 

Energy & Fuel

 

Fossil fuel markets are set to become more volatile and unpredictable because of higher global energy demand; changes in where fossil fuels are consumed; supply and production uncertainties; and increasing regulatory interventions related to climate change. All companies – regardless of sector, size, or location – will find it difficult to plan for and manage energy costs, especially those related to fossilfuel use.

 

Companies that become more energy efficient and/or use more alternative and renewable sources of energy, however, would be able to lower their exposure to fossil fuel-related risks and improve their financial performance. The Carbon Disclosure Project1 (CDP) two years ago highlighted the link between cutting emissions and financial outperformance.

 

While some businesses are moving slowly towards alternative and renewable sources of energy, most corporations continue to depend heavily on oil, coal and gas for power, fuel and raw materials. Just three percent of electricity generation came from non-hydro renewable sources in 2010 – including hydro, the total is 13 percent while 81 percent of power is fossil-fuelled. There are few signs that the urgently needed change in direction in global energy trends is under way,” the IEA says in its World Energy Outlook 2011.

 

Romania has a balanced portfolio of generation capacities comprising hydro, nuclear, coal and gas-fired power plants, with renewables (other than hydropower) representing a small but rapidly growing subsector of the generation market (Figure 1). Abundant domestic resources exist for coal-fired and hydropower generation, while the share of natural gas in the power generation sector is relatively low because a significant part of natural gas consumption is sourced from imports. Due to the draught in 2012, the electricity production from hydrological sources decreased considerably, making Romania a net importer of electricity in: January, March, May, August and September. However, the energy mix shows a slight increase of wind share comparing with 2011 (1.9%).

 

Energy businesses must prepare for shifts in fuel mix due to policy, supply, and fuel prices. These businesses, particularly those involved in renewable energy, must also remain actively involved in policy debates that will impact both total global energy demand and the fuel mix through carbon or renewable energy policies. But other industries need to pay attention to the issue as well. Fossil fuel-dependent transportation industries such as aviation, shipping and manufacturers that use petroleum as a process input, such as plastic or chemical producers, will need robust strategies and plans to address fuel price volatility and potential shortages. Vehicle and electrical appliance suppliers, manufacturers and retailers must prepare for significant energy consumption increases in the developing world, and adjust product design and development strategies accordingly.

 

All of these drivers create a market for companies that can help customers to become more energy efficient. Equally, companies that can bring low-carbon power to the world’s poorest people by “leapfrogging” large-scale utility infrastructure are well-placed.

 

The energy mix is likely to slowly change in coming years, but fossil fuels will continue to dominate world energy supply to 2035 (Figure 2 ), making up 75 percent of the energy mix – and in absolute terms, more fossil fuel will be consumed than today.

 

“World primary demand for energy increases by one-third between 2010 and 2035 and energy-related CO2 emissions increase by 20 percent,” the IEA2 adds. It also projects that over the next 25 years, 90 percent of the projected growth in global energy demand will come from non-OECD economies. Businesses in the OECD therefore face a situation where the dynamics of the global energy market are increasingly decided elsewhere.

 

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