A Point of View.

Driven largely by consumer demands for a cleaner energy system and investor pressures for reliable financial, as well as environmental, social and governance (ESG) performance, the sprint to decarbonization is on. The industry has set ambitious emissions-related targets to retain its right to operate during and after the transition to a low-carbon/net-zero energy system.

The global energy sector counts for three quarters of direct and indirect greenhouse gas (GHG) emissions (scope 1, 2, 3 .. will be discussed later). For this industry sector the energy transition is a pathway toward transformation from fossil-based to zero-carbon by the second half of this century. At its heart is the need to reduce energy related CO2 emissions to limit climate change. Decarbonization of the energy sector requires urgent action on a global scale, and while a global energy transition is underway, further action is needed to reduce carbon emissions and mitigate the effects of climate change.

Greenhouse gas emissions per industry sector

But this does not necessarily mean that all energy companies are dropping hydrocarbons and moving to renewables right away. DNV, an independent assurance and risk management provider headquartered in Norway, published a report, “Energy Transition Outlook 2022,” that predicts only 51% of the energy mix will be non-fossil by 2050. There are two reasons for this: affordability and security—not so much physical security, but security in the sense of a secure energy supply.

Europe had to experience the negative side of this when Russia declared war on Ukraine, and their natural gas supply was disrupted. In general, geopolitics tend to accelerate the speed of change away from fossil fuel and towards more localized and disposable energy sources but also agility and resilience in the end-to-end industry value chain is critical. In addition, cheap wind and sun energy, and strong sustainability trends are key accelerators for the energy transition.

All these aspects are critical, and this underpins the important role of the energy industry in the global push for energy security and carbon reduction.

For most companies, sustainable energy transition generally means transitioning to business models and sources of energy that result in net-zero carbon emissions. Therefore, companies are digitally transforming their business models to diversify and move to carbon neutral revenue streams. Intelligent asset management plays a key role for efficient operations and cost management, driving operational efficiency, reduced emissions, and reduced energy usage. On top a wide range of regulations puts a huge strain on the established IT solutions.

How energy companies are transforming their business models to diversify and move to carbon-neutral revenue streams

The future vision of a net zero energy system will be strongly decentralized and require high network intelligence, compared to the highly centralized and controlled existing model. Central power plants fired by fossil oil, gas, coal are being replaced by central and decentral wind, solar, hydrogen power plants. Major power lines are built to connect distributed wind and solar farms. Gas pipelines are rebuilt for i.e. methane. LNG & oil supply chains are rebuilt for green hydrogen. Fossil storages are replaced by power storages filled with renewable energy.

New business models are needed to pay for the transformation, but also because the traditional boundaries across industries are quickly disappearing:

The decentralized feed-in and the volatility in generation requires fundamental adjustments to the infrastructure, supported by an intelligent network and intelligent data management. All devices must be integrated into the communication infrastructure to enable orchestration and optimized interaction, opening up huge potential for digital business models currently limited to telecommunication companies.

Distributed energy resources that are connected may use the sharing principle and disrupt existing business linear models based on centralized generation/storage and proprietary transportation/distribution networks. Power Storage has to compensate for volatilities and enable long distance transport of renewable energy.

Mobility Services for the next generation are on the run – electrification is in the core. eMobility can make a significant contribution to network services.

Circularity thinking need to be established in all areas, e.g. refurbishment or recycling processes need to be integrated in the lifecycle design.

Decarbonizing the supply chain and production is a must to provide evidence for a reduction of the carbon footprint and demonstrate social responsibility in the reduction of greenhouse emissions. Given the demand there are massive opportunities to expand business into operational services e.g. offer solutions and services to help industrial customers to decarbonize their supply-chains, support private households charging points for e-cars, installation and operation of solar panels and home batteries etc.

Some examples:

• Fuel retailers transform conventional vehicle-centric service stations into preferred multipurpose destinations, and to offer a personalized consumer experience
• A US-based company establishes a low-carbon venture with a portfolio of solutions to address different aspects of emissions measurement and reduction technologies from EOR (enhanced oil recovery), through carbon sequestration, direct air capture, trading low-carbon hydrocarbon products, power generation and lithium extraction
• A Central European integrated company has started tackling the circular economy by converting plastic waste to refinery feedstocks in a new pilot project. The process output produces synthetic feedstock that can then be processed into any refined product.
• An operator has reduced waste with increased re-use from drilling muds used in exploration. The process results in fuel and water which are reapplied at different points in the drilling operations
• A steelmaker reduced its annual loss from imbalance between measured power consumption of individual assets and total consumption by $12 million through a better understanding of its power consumption
• A cement manufacturer was able to improve its energy efficiency by implementing a digital assistant to the Clinker Kiln Operator. In addition to a 3% reduction in specific gas consumption, the stable operating time of the kiln was extended by 48 days, resulting in a higher quality of the finished product

The role of intelligent asset management for efficient operations and cost management

A decentralized infrastructure must be supported by an intelligent network and intelligent data management. All devices must be integrated into the communication infrastructure to enable orchestration and optimized interaction.

Exponentially increasing number of asset e.g. by 2030y potentially be around 600 million heating and cooling systems, 40 million charging stations for e-mobility, 60 M battery storages, in addition to the millions of solar panels, smart devices. Tracking of very large numbers of any type of equipment will be a key prerequisite for any company in any industry.

Detailed, long-term Asset Investment Planning tools taking the remaining useful life of the assets as well as the future energy demand into account is therefore required.

Detailed risk and criticality analysis of the assets and thus an optimized maintenance strategy should be automatically scheduled to the best matching field technician, making sure the required spare parts are available even in case of remote assets (Remote Field Logistics).

There is a need to integrate plant maintenance activities with Emissions Management tasks, monitor emissions alarms and schedule emissions inspections and reduce GHG emissions from operations, facilities and equipment via effective maintenance surveillance.

In general we need to embed sustainability in the maintenance as well as in in the procurement processes.

Scope 1, 2, 3 GHG emissions and the importance of an integrated end-to-end platform (to tackle these) and to adopt new business models

Greenhouse gas emissions are divided into three categories for businesses and organizations – Scope 1, Scope 2 and Scope 3. Companies will need to cut emissions across all three scopes to meet internationally agreed targets on global warming. Scope 3 emissions are usually the hardest to measure and tackle, as they cover those produced by customers using the company’s products.

So, what’s the difference between Scope 1, 2 and 3 emissions?

The Scope 1, 2 and 3 system has been developed by the Greenhouse Gas Protocol.

Scope 1 emissions

These are “direct” emissions – those that a company causes by operating the things that it owns or controls. These can be a result of running machinery to make products, driving vehicles, or just heating buildings and powering computers.

Scope 2 emissions

These are “indirect” emissions created by the production of the energy that an organization buys. Installing solar panels or sourcing renewable energy rather than using electricity generated using fossil fuels would cut a company’s Scope 2 emissions.

Scope 3 emissions

These are also indirect emissions – meaning those not produced by the company itself – but they differ from Scope 2 as they cover those produced by customers using the company’s products or those produced by suppliers making products that the company uses.

No prizes for guessing which of the three scopes is the hardest to tackle – and it is often the most significant.

“Scope 3 emissions are nearly always the big one,” says Deloitte, adding that it often accounts for more than 70% of a business’ carbon footprint.

Companies can normally easily measure their Scope 1 and 2 emissions, and can control them by taking steps like switching to renewable energy or electric vehicles.

But Scope 3 emissions are under the control of suppliers or customers, so they are affected by decisions made outside the company.

That means measuring Scope 3 emissions involves tracking activities across the entire business model – or value chain– from suppliers to end users.

How SAP can help customers to tackle the Net Zero journey and achieve their business transformational goals

Our sustainability portfolio addresses 4 dimensions, including:

• holistic steering and reporting,
• climate action,
• circular economy, and
• social responsibility.

You cannot change what you can’t measure. So, insights, reporting, and analytics on 1, 2, 3 scope emissions across an enterprise’s activities remain the foundation for all corporate climate strategies.

To protect value, both financial and reputational, companies need to intervene wisely across 1,2,3 scope emissions to avoid creating new emissions and reducing their existing emissions.

For many companies however Net Zero targets will only be met by going to the external carbon market to offset emission which cannot be avoided or reduced. For some carbon intensive industries management of emissions (actions across scope 1, 2, 3) isn’t enough, the only way to grow in a carbon constrained world is business model transition and reinvention.

Business resilience is required both financially, as the external cost of carbon is increasingly priced, and physically. Physical resilience will be essential to avoid disruptions to operations and supply chains.

But on the sustainability journey there are numerous challenges that have to be solved. When it comes to providing accurate and complete ESG data, companies need to take a 3-step sustainability transformation journey:

1. Record ESG data based on actuals, not averages.
   The first step is to gather all necessary ESG data along the entire value chain. This data cannot be found easily in one single system. But currently this is a highly manual and therefore time-consuming effort. Often there are data quality challenges.
2. Report against a quickly evolving set of ESG standards.
   There are >600 ESG frameworks / standards out there and they are being constantly developed further. Therefore, the requirements for companies are constantly changing. A high effort is required to keep up with the current requirements to report along the respective regulatory & voluntary frameworks.
3. Act beyond ambitious targets by embedding sustainability across all of their business processes and their value chains and business model.

In many companies sustainability action is already happening but in many cases this this is still partly disjoint from the strategy or not yet covering all business processes.

Through a highly differentiated set of products and services, we enable organizations to assess and reduce their carbon footprint, increase resource productivity through circular processes, and run safer, sustainable business processes while providing industry-specific insights that combine operational and financial data across value chains, embedded in core business processes. These include:

• Responsible Design and production
  • Provide visibility into product use and insight into material value maintenance or loss at end-of-life. Provide material, product and customer insights to create new value and develop innovative business models.
• Responsible Consumption
  • Engage and empower producers and consumers to choose more sustainable products and improve product experience across the entire product lifecycle.
• Responsible Sourcing and Marketplace
  • Ethically connect sources of secondary material demand to supply, to maintain its highest value.
  • Sustainable supplier onboarding (including Code of Conduct, Diversity indicators and CSR programs)
  • Supplier development plans with concrete sustainability targets (e.g. CO2 reduction target)
  • Workflows to promote or enforce the use of ethical suppliers
  • Sustainability as criteria in sourcing decisions
  • Integration of sustainability in supplier contracts
• Resources Recovery & Reuse
  • Provide insights businesses need to deliver collection, processing, recycling and composting infrastructure to increase cycling of material flows at their highest value.

Targeted Sustainable Energy Transition initiatives and services focus on assessing, strategizing, prioritizing and aligning sustainability objectives. These include:

• Sustainability Advisory
  Defining key sustainability ambitions and use cases, prioritizing them, and creating a plan.
• Sustainability Assessment
  Bridge the gap between strategy (sustainability goals and ambitions) and execution (the technical implementation).
  Assess the data in existing systems and use it to further your sustainability efforts.

• Sustainability Implementation

Bottomline

At SAP we believe, that we can approach sustainable business in a systematic way by embedding sustainability into end to end processes along the entire value chain. We have seen, that a business needs to react on changing consumer preferences, global resource shortages, and upcoming regulations. Our customers need new data structure, which cover sustainability parameters. They need new evaluation possibilities, to create insights and they need an Intelligent Enteprise approach to optimize their processes.

With new capabilities for Assessment, Evaluation, and Optimization, along our end-to-end processes, we can help enterprises to build sustainable businesses.

The sustainable energy transition is a game changer – for many industries. Today’s ultimate business challenge and opportunity is to make sustainability profitable and profitability sustainable.