Francesco Starace speaks with IHS Markit Vice Chairman Daniel Yergin for a new edition of CERAWeek Conversations – available at https://ondemand.ceraweek.com/cwc

The CEO of Enel—one of the world's largest electric power companies—discusses what it means to be a renewable energy and renewable power "supermajor" in the latest edition of CERAWeek Conversations.

In a conversation with Daniel Yergin, vice chairman, IHS Markit (NYSE:INFO), Enel CEO Francesco Starace talks about decarbonizing electricity grids through large-scale renewable investments; the "less-obvious" role that improved materials play alongside digital advances; and financial innovations in the sustainable development bond market.

Starace also shares his thoughts on the momentum for energy transition and the European Union's "Fit for 55" emissions reduction target, which he believes is achievable. "It's not a big deal. It would be best for Europe," he says.

He also discusses his outlook for hydrogen; "hand-in-hand" collaborations with electric vehicle manufacturers; and his thoughts on traditional oil and gas companies entering the renewable power generation space.

"[Oil and gas companies] are much better to have as competitors rather than the wild bunch that we have today," he says. Today we have all developers. Anyone who wants to build a project and sell it can do that. They don't really care about returns or dividends over 20-30 years.

"They just want to build and sell," he continues. "A utility has a different view. And an oil and gas company has more discipline and value to shareholders that they need to [maintain]. It would be much better for the sector if the expanding space would be filled by rational, experienced players rather than another bunch of cowboys that we've had so far."

"A growing shortage of people," he observes, is "the bottleneck of the industry today."

The complete video is available at: https://ondemand.ceraweek.com/cwc

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Selected excerpts:

Interview Recorded Wednesday, September 8, 2021

(Edited slightly for brevity only)

On the scale of the energy transition and the technology drivers that are enabling it:

"It looks like a very large tide. It's not a wave. It's a big tidal movement moving with very strong momentum. I think that momentum is likely to be there for the next 10 years at least. It's driven by technology, most deeply. The real momentum is technology-driven, and the technology drivers are two: One is digital; the other one, maybe less obvious, is the incredible and continuous improvements that material science is throwing at things. Things are made of materials and materials get better and better. This explains deep down the transition in the power segment in the energy field.

"Materials with which we make things—they are lighter, more resistant, less expensive, easier to recycle, more precise to [manufacture]. All of that stuff gets into machinery that [has] more performance and, combined with digital, you see the performance of technologies that existed for many years and all of sudden blossom. That's going to continue for a long time.

"I've seen different waves of energy transformation. The only big difference today is that the speed at which this transition is happening is so much faster that not only people who work in the sector, but everybody is exposed to the impact of this transition."

On timetables of innovation and "death rates" of technologies:

"There is a fascination in this industry populated by engineers. We engineers like science fiction and the progress of technology itself to the point that, things we like, we think will happen faster and better than they [actually do.] There is a tendency in the sector to believe that because something is new it will have success. But we forget that many promising technologies died along the way. There is a death rate in technologies that we need to factor into our projections for the future. The rule of thumb is that if you have a technology with which you have been trying to make a difference, and in three or five years if it doesn't really move the needle, you better drop it. Don't try and try because it's better with something else. Trying to revive dead horses doesn't make them run. They're dead."

On the outlook for hydrogen energy:

"Hydrogen has been around for a while. The only new thing is that renewables are cheap, which was not the case [before]. And because renewables are cheap, then producing hydrogen by hydrolysis can become theoretically competitive with existing hydrogen production, if the industry of hydrolyzers becomes an industry and not just a bespoke luxury niche, which can happen.

"Solar panels we only used them in satellites; they cost a fortune, but now they are cheap. It can happen provided people really focus on becoming an industry. This is something that the world has demonstrated over the years can happen. If hydrolyzers become cheaper and more efficient, coupled with cheap renewable energy, then hydrogen produced by hydrolysis can become competitive.

"Then, of course, you can use hydrogen for storage, but let's not forget you need 50 kwh of electricity to produce one kilogram of hydrogen. And 50 kwh in a car drives you 250 km. It's a lot of energy [for] one kilogram. It's a very precious substance. It can be used when the molecule of hydrogen is needed.

"As an electricity provider it's great. It boosts demand of electricity many-fold. But again, you have to ask: Can the world waste electricity and then use hydrogen to heat your home? Just heat your home with electricity. It's faster and cheaper."

On Enel's 10-year business strategy and decarbonization agenda to 2030:

"We have big Scope 1 CO2 [emissions]. The first thing is to phase out thermal generation whenever is possible, safely [and responsibly]. We have a program of investing in renewable generation [over the next decade] …reaching 145,000 MW of renewable generation capacity starting from about 50,000. This will treble in the next eight years. That entails an investment of roughly 10 billion euros a year. That can only happen if we also invest in networks because renewable generation requires a lot of connectivity and a big change in the network systems. Today, we have one of the largest privately owned systems worldwide with more than 70 million meters connected to our network. The two investments are networks and renewables.

"That's just for Scope 1. Then we have Scope 3—our [Scope 2] internal carbon footprint is really small. Scope 3 is huge because all our vendors, suppliers, and customers to whom we still sell gas, they have a carbon footprint because of the work we give them. That is now bigger than Scope 1 already. This year is the [first] year in which our Scope 1 emissions are lower than the Scope 3 value chain that we work with. That is hard work because you need to work with thousands of suppliers, put down metrics, let them understand, show them that there is some advantage if they bring CO2 down, so it comes with some kind of clever purchasing and contracting strategy. It's a huge exercise."

On human capital shortages in the renewable energy industry:

"There is [also] a growing shortage of people that are necessary for this industry to expand as fast as needed. I would argue that today there is not a limitation in renewable energy in general, but in the electricity sector. There is not a shortage of money. There is not a shortage of opportunities, where to invest or plants to build. But the limiting factor is the number of skilled people that you can put to work in a unit of time. That's really the bottleneck of the industry today. This industry needs to grow many-fold. It can succeed only if we find the right [people] and put them to work together in the right way. It's an effort."

On collaborations between energy producers and electric vehicle manufacturers:

"The nexus that today exists between our industry and the car manufacturers is fundamental because if a car needs to be electrified then electricity becomes important, and not just the electrons, but the ways in which these electrons get into the car, and the ways in which they interact, and the way in which a customer can have the best experience while charging or discharging a car. We have relationships with car manufacturers that we never had before. Now it's a technology exchange. Deep down in the way they design their cars, the way their charging systems evolve because our charging system must follow to anticipate their changes. It's a huge hand-in-hand trip that we have to do together.

"They are undergoing the transition that we went through 10 years ago in a faster and more troublesome way. I have a lot of understanding for the pains that car manufacturers have to go through because we went through them. We had our write-offs; we had our mistakes. And now I see this happening in an accelerated way in road transportation in general, not just cars. And we have to help them do this in the best possible way."

On the moves by traditional oil and gas companies into the renewable power generation space:

"We need all the help we can get in this sector. The sector is expanding five or sixfold in the next few years. The space is literally sucking in any player that wants to get there. We trebled our renewable energy position, but we have today [around] 4% of the world's global installed capacity. By trebling our capacity, we will still be at 3-4%. That means anybody can come in and give it a try. They are much better to have as competitors rather than the wild bunch that we have today. Today we have all developers. Anyone who wants to build a project and sell it can do that. They don't really care about returns or dividends over 20-30 years. They just want to build and sell. A utility has a different view. And an oil and gas company has more discipline and value to shareholders that they need to [maintain]. It would be much better for the sector if the expanding space would be filled by rational, experienced players rather than another bunch of cowboys that we've had so far."

On the EU's green ambitions and "Fit for 55" target:

"I think it's right. They can do 55 [percent reduction in net greenhouse gas emissions by 2030 compared to 1990]. It's not a big deal. It would be best for Europe. Europe needs to free itself from this carbon dependence because it's not functional from an economic view. It's not just about getting off carbon, it's about changing the infrastructure that is functional to that end, which means huge money in networks. Without networks being resilient, more interconnected, and more digital, this will be more difficult. It's time to understand this neglected space in the energy sector which is interconnecting networks and distribution networks. This happens when you electrify, because when you electrify you need to distribute."

On Enel's strategy of issuing sustainability development bonds:

"We've been issuing green bonds for several years. We were always puzzled by the fact that green bonds traded at a premium to normal bonds, so if you issued a green bond you were paying more to people lending you money, which in our opinion was crazy. [We saw it as no longer] giving me money to build a plant or [launch an initiative]. I wanted to have a different approach.

"We went to the bond market [in 2019] and said [to investors]: "Do you agree that if by 2021 we reach a certain percentage of renewable capacity in our mix the risk profile of our company would be lower?" The answer was yes, it will be lower because you will be less exposed to commodities and less carbon intensive. So, if that is the case wouldn't you agree that we should pay less and not more than the market bond rate? Yes, in principle, but what happens if you don't reach that percentage by 2021? Then I said if we don't reach that point then we would jack up interest rates. That was it. The market said this was an incredible innovation in the bond market linking sustainable development targets to a bond performance. We issued the first bond in the U.S. market and it was a big success. We duplicated it in the European market. Then we kept working at it. Today we have all of our financial instruments—bonds, loans, commercial paper, swaps—linked to some sustainable development goal commitment that we took.

"We have a big debt—debt that is close to 50 billion euros. But we are progressively putting all this debt into sustainable development-linked instruments. We are about 30% on the way to succeeding. We are going to be 100% in that direction as the maturity of the old debt allows us to do that. This debt is less expensive. So, it's a good way of showing that becoming sustainable is also economically convenient."

Watch the complete video at: https://ondemand.ceraweek.com/cwc

Recent CERAWeek Conversations segments also include:

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Leadership Dialogue with Lydie Hudson – CEO, sustainability, research and investment solutions, Credit Suisse; Interviewed by Atul Arya, senior vice president and chief energy strategist, IHS Markit

Solar Energy and Storage: The Symbiotic Relationship – Michael Grasso, executive vice president, Chief Marketing and Growth Office, Sunnova Matteo; Jaramillo, CEO and co-founder, Form Energy; Leonardo Moreno, president, AES Clean Energy; Moderated by Cormac Gilligan, associate director, solar and energy storage, IHS Markit
Oil and the Energy Transition: A Long Goodbye? – Jeff Currie, global head of commodities research, Goldman Sachs; Saad Rahim, chief economist, Trafigura; Moderated by Jim Burkhard, vice president, oil markets, energy and mobility, IHS Markit

About CERAWeek Conversations:

CERAWeek Conversations features original interviews and discussion with energy industry leaders, government officials and policymakers, leaders from the technology, financial and industrial communities—and energy technology innovators.

The series is produced by the team responsible for the world's preeminent energy conference, CERAWeek by IHS Markit.

The complete episode library is available at https://ondemand.ceraweek.com/cwc.

CERAWeek Conversations is also available via audio podcast on Apple Podcasts, Google Podcasts, Soundcloud, Spotify and Stitcher.

About IHS Markit (www.ihsmarkit.com)

IHS Markit (NYSE:INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and the world's leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth.

IHS Markit is a registered trademark of IHS Markit Ltd. and/or its affiliates. All other company and product names may be trademarks of their respective owners © 2021 IHS Markit Ltd. All rights reserved.

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