Alex Grant, Equinor – UK Country Manager, on the Trade-offs of Net Zero

What trade-offs will we need to make to achieve net zero? Listen to Jason Mitchell discuss with Alex Grant, Equinor UK Country Manager, about the state of the energy transition, the trade-offs that we are increasingly facing between security of supply, affordability and decarbonisation; and emerging energy technologies.

Recording date: 06 June 2025

Alex Grant

Alex Grant is Senior Vice President, UK Country Manager and Global Head of Crude, Products & Liquids Trading at Equinor. He joined Equinor in 2017 as the Senior Vice President for Global Business Development, where he oversaw mergers, acquisitions, and divestments across the oil, gas, and renewables portfolios. Before Equinor, Alex worked in investment banking at Jefferies, focussing on M&A and financing transactions within the energy sector for over 20 years.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

Welcome to the podcast. Alex Grant, it's great to have you here. Thank you for taking the time today.

Alex Grant:

Thank you for having me back again, Jason.

Jason Mitchell:

Absolutely. It's great to be in Equinor headquarters in London, too.

Alex Grant:

Yeah. It's good to have you here.

Jason Mitchell:

Excellent. Alex, I want to start with an anecdote. When we met in Glasgow at COP 21 specifically, where you said you'd intentionally worn a not good suit just in case you were egged by climate protesters. Now, I'm going to try and extend that metaphor, maybe unsuccessfully, but are you back wearing, not much into clothing, but nice super 180 suit fabric? In other words, what's the mood of the energy majors vis-à-vis the policy environment given the prioritisation of energy security and affordability?

Alex Grant:

Yeah, I remember that. One of the things when you come on again is you have to squint and listen again to speaking on the last podcast and all those firm predictions I made that turned out to be completely wrong, but one or two things that seemed to have come through.

On this particular one, I remember talking about worrying we wouldn't be welcome at COP 26 in Glasgow. Worrying that we'd have a lot of protests against. I was wrong about it at the time. We went and of course people had very different views to ours, but everyone had a common goal. It was to get to net-zero, and everyone was working constructively in trying to push their ideas to do it. It was a very constructive atmosphere that I encountered. So wrong to where the, whatever you called it, 180 suit at the time.

I have to say since then, things have got quite a bit more polarised. Here in the UK as well. The UK's been relatively pragmatic compared to some other countries on terms of decarbonization, but it has been more of a challenge. That is one of the things that I worry about. Increasingly, we start to see the world into people that want to decarbonize and get to net-zero at all cost and at any cost, even at a cost of putting millions into fuel poverty. And another half of the world that says, "We just need to focus on getting as cheaper bills as possible and forget all of this net-zero nonsense." Of course, both of those extremist views are not helpful. It's a pragmatic way that is important.

One thing I would say on that is part of the difficulty is I personally and we at Equinor believe that the energy transition is going to cost. To get to net-zero, it will cost more than not pursuing net-zero. But when compared to the cost of not getting to net-zero in terms of climate change, that is a cost that society will be prepared to accept. But we have to be open and honest with society that there is that cost. At the moment, the narrative is net-zero will lower bills, it will increase jobs, it will save the planet. Well, what's not to love? Just get out the way, governments and planners, et cetera. Let capitalism take its course and we'll have a greener, more prosperous and higher job future. But unfortunately, I don't think it's going to be as simple as that.

Jason Mitchell:

Yeah, that's a great overview. If you put aside policy agendas and academic critiques, what have the last five years since the energy crisis taught us really about the real world decarbonization effort, and the speed and direction of the energy transition? I guess, if it felt like we were in, I guess late stage energy capitalism of sorts way back then, how have the circumstances and all the events, Russia, the emergence of AI, the expansion of IT, how have they all changed that?

Alex Grant:

I think the main thing that's happened is, as transition has started, and we're still I think in early stage of transition. As it started, there has become more of a realisation of the underlying costs. Traditionally, people have thought about costs as LCOE. How much does it cost to produce some energy? Unfortunately, it's the most easy to understand, but it's only one small part of the equation. As important and of increasing importance is how much does it cost to produce energy when people want to use energy?

Now, there's some easy parts on that. When you go to the demand side, well, let's try and moderate demand so that people want it when we can produce it cheaply. And fully support as much as we can do on those sort of demand side response. Even when you go far on that, there is still nevertheless the problem that people want energy when they want it, not when the wind is blowing and the sun is shining, and that has a cost to it. That needs to be baked in.

This LCOE issue is part of the thing that I think is started to be debunked. It's called different things. System costs, grid upgrade issues, security of supply costs. But essentially, it is down to that piece of producing energy when people want it, not just producing it when you can produce it.

Jason Mitchell:

Yeah, it's a really good point. In preparing for this and listening back to the episode we did back in January 2022, one of the main messages from that conversation from you was that there was a lack of flexibility in the system which ends up specifically adding a risk premium to the prices we see on the screen. If a lack of system flexibility and stability means a high risk premium, what does five years worth of improved system flexibility and stability, and diversity of energy supply mean for prices? I guess what I'm asking is what have we achieved since that last podcast?

Alex Grant:

Increased flexibility will, I believe, mean lower risk premium on the price. However, the cost of that flexibility will mean that the prices are higher. But you do need that flexibility. When you design a system, when we design an offshore wind turbine, we don't build it so it can survive a wave that might come next week or next year. We build it so it'll survive the 50-year wave or the 100-year wave. When you build an energy system, in the UK for example, you don't build it so that we'll survive average demand fluctuations, or average wind or solar output. You need to be build a system that can survive a 30-year situation where there's no wind, there's no sun, and everybody for whatever reason, the World Cup is on, is watching their tellies and using a lot of energy. You have to design a system to withstand that. If you don't, you get blackouts.

There's been a lot of chatter recently about what's happened in Spain and what's happened in Heathrow. I think the jury is still out on why or how. I don't know the reason and speculate, but I think there's one thing that we can very much conclude from it. Which is if it happens, the consequences are really big. It's not just that we have to sit and read books under candles for a while. It is hospitals aren't working, and people are trapped underground. People die that wouldn't have died if they hadn't. Indeed, if you model it that you have a blackout for longer, the modelling is that you get societal breakdown. These things are not just little issues you might have. You have to design the systems farther and that costs.

Jason Mitchell:

It's a really good point and I want to dig into this a little bit more. I realise Bjorn Lomborg is, for some people, somewhat of a controversial character. But he's recently written that the UK and Germany, and this is in a Wall Street Journal article, "have so much low cost solar and wind power that their electricity costs have become among the world's most expensive." In other words, in a country with little or no solar-wind, average electricity cost is, according to him, 11 cents per kilowatt-hour. For every 10 percentage points of solar and wind, that cost increases by more than 4 cents per kilowatt-hour.

Let me actually bring that over to a real life anecdote. My son goes to a state primary school in the UK, in London. That school's energy bill has more than doubled in the last five years. That's an apples for apples comparison. That seems to suggest that for all the innovation and the flexibility in the grid stability, and importantly the investment into the energy system we've achieved. For instances, as you well know, renewables have gone, over the last five years, from something like 35% of the energy mix up to more than 50%. Just given all that, we haven't really made the kind of gains that end up translating into greater affordability.

I guess this is the intuitive issue that I keep running into, and I think a lot of people run into. How would you explain that? Or is the explanation that we simply have to resign ourselves to being effectively hostage to, according to the Office of National Statistics, this strong rise in gas prices when end up dictating energy prices as a whole?

Alex Grant:

Yeah. Yeah, very good question. One thing I'd say just on the specifics of the question. Renewables has gone from 35% to 50% of the electricity mix. That's another one, along with LCOE, which I sometimes struggle with. Electricity is probably the most important part, or a very important part of the energy mix, but it is only 20% of the energy the UK consumes. That has been roughly flat over the last four or five years. All the grid upgrades we've done, et cetera, it's not because we are electrifying more of our energy content. We need to do that, but it's been relatively flat. When we talk about renewables, we're talking about it as it applies to 20% of the energy we consume.

There, again, I have some struggles. Which is very important part to focus on, but it's like saying, "We need to run a marathon to net-zero of 26 miles, but what we're going to focus on is running miles four to nine as fast as we can at all costs." That is not necessarily the way you get the quickest time in your marathon. We need to look at what do we get best bang for our buck? Pragmatic way to do it. Not necessarily set targets where we try and achieve them at all costs if it's to the detriment of other things that will get us there

quicker or cheaper. When it comes then to the overall costs, I think bills have gone up. Undoubtedly, that is because of gas and commodity prices. Gas is the marginal supplier. The whole world of capitalism relies upon marginal cost and supply. Unless gas stops becoming the marginal supplier, it will always set the price. Maybe and hopefully we get there at one point. If we build out more renewables and use less gas, then even if it is setting the marginal price, we're using less of it so it's going to cost us less in absolute terms. Hopefully that will come. But I think we have to recognise that it is the marginal supplier and will be for some time to come.

Then lastly, maybe I'm going to try an anecdote on just trying to explain this cost of flexibility, Jason. You can cut this if it doesn't work very well. The way I've been thinking about explaining it is I have a full-time job. My wife also works full-time. We have three young kids who are at various stages of primary and just going into secondary school. It's very hard to manage all of that, but we have a nanny. The nanny is wonderful. She comes early to our house when we've both got early work. She'll stay late if we need to work late. But if one of us can work at home for an afternoon, then she'll go home and we can take it. The kids love her. She can get there very quickly or leave if we don't need her. Extremely flexible. But she's expensive, £50 an hour, but that's our system.

But now, we've found another solution a green nanny. He's even better. He cycles to our house. The kids absolutely adore him, plays with him the whole time. He's very good with them. No problems at all. He's cheaper, he's only £30 an hour. Again, what's not to love? Let's move to green nanny. The only problem with green nanny is he's got a grandma that's not well. Every now and again, he has to disappear at short notice. Also, he's prone, when the sun's not shining and the wind's not blowing, which we can't predict that often, he's prone to headaches and then he can't come to work. That's really difficult for us to struggle to keep our jobs going and to keep the lights on. What we've had to do is employ grey nanny as standby. She sits at home. When she's sitting at home, she's not working, so she's not emitting CO2. But we still have to pay her £40 an hour to sit at home because she's got to be on call at any point. She's got to be built as a power station, or a battery, or whatever it may be.

Now we have a system where we have a standby that's £40 an hour, sometimes 50 when we use it. We have green nanny at £30 an hour. Our system is 70 or 80 pounds. Compared to previously, it was only 50. The system costs are higher. The LCOEs, the cost of using them. Green nanny is cheaper, only 30 versus the 50, but that's not the right comparison. It's that overall. This is called system costs, or upgrade, or flexibility costs, it has different meanings, but that essentially is the underlying dynamic.

Jason Mitchell:

Say more about this. Are you suggesting we go back to grey nanny?

Alex Grant:

No, I'm not. That's part of, when I discuss a lot, people think that I'm purporting let's just be on the idealist side of get rid of net-zero and go back to using coal. I'm not saying that we go back to grey nanny. We should use green nanny as much as we're able to. But we just need to recognise that in using him, number one, it's great because when we're using him, he's not emitting CO2. That's why we need to do it, use him as much as possible. Push as much renewables into the system as we can and keep pushing it, and keep pushing it. But recognise that in doing that, we have to keep the flexibility as well. Otherwise, my example, someone has to stay at home and not work. But in a system example, the lights go out. We have to have that backup and that backup costs money. Let's recognise that's the case, and instead work to minimise the cost. But if we are saying to society, to everyone that it bears no cost, how can we be transparent on how do we minimise it and find the right way to do that?

Jason Mitchell:

This is so interesting because, I confess, I feel a little bit naïve in a certain sense. I guess I've always seen security of supply and decarbonization at odds, at tension within the energy trilemma. I don't think I fully appreciated how much tension there is or how antithetical decarbonization is with affordability in this light.

Alex Grant:

Yeah. That's where I think it is. It's a kind of at paradox or at polarisation, where you have to find that right balance. If you go full-throttle decarbonization at all costs, it will come up big costs. If you go the other way, it will come at cost to the environment. How do you find that right balance of decarbonization quick enough for cheap enough? The first thing we've got to do is recognise it, be transparent about it, and show what the costs are. And try and develop a system where lowest costs of decarbonization wins. The environment does not care how you take the CO2 out, it just cares that CO2 is taken out. The economy does not care how much dollars are spent, it just cares the lowest cost spent is the best way to do it. Balance those things, transparency, all important.

Jason Mitchell:

Yeah. I want to stay on this for a second, at the risk of complicating this. But if you were to think about longterm contract for different in CFD-style contracts, and the optimal way of structuring them such that you ensure affordability and price stability for consumers, what does that look like? I guess as you build capacity in a grey and green nanny way, how do you build these CFD-type structures in way that doesn't end up locking in costs that don't reflect potentially price declines in the future?

Alex Grant:

Firstly, to talk about the CFDs. Especially here in the UK, they've been a massive success. You need to just look at the wind build out we've had on the back of that, but a lot of other things and mechanisms that government and the regulators have put in place. To look at the success we've had especially in offshore wind build out. First of all, let's recognise they've been very successful in encouraging investment.

Secondly, we are very much supporters of those continuing going forward because we believe we need to push out as much as we can of offshore wind and other methods of renewables. Very much support the government's drive on that here in the UK. But we need to find a better way of showing what the cost of that is because as you provide a CFD with a fixed price to the producer, that is on a fixed average price. As you build more and more of these renewables, you'll be producing renewable electricity when there is already a lot being produced where it's needed less. You won't be producing it when the prices are high, i.e. a signal being sent that we need more.

We need to get the flip side of that, which is the capacity mechanisms, et cetera. Here, actually the UK is much further advanced than a lot of continental Europe, who are trying to model their UK example of trying to what we call capacity mechanism. Which is, in some way, trying to price the need for that flexibility. It's bringing the two together, basically.

Jason Mitchell:

Yeah.

Alex Grant:

But a CFD is a subsidy and we have to recognise that, even if it's at a level that is the same as the average electricity price.

Jason Mitchell:

Yeah. In the last podcast, and this is with Professor Sir Dieter Helm, he makes the point that our understanding of the economics around the LCOE, the levelized cost of energy, and specifically around renewables are misguided or misrepresented. In the sense that what we see in that LCOE picture around renewable and wind doesn't really account for systems-type costs. Can you talk a little bit more about what that means at a system level?

I guess as an extension of that, because he and I talked about this as well. In fact actually, I think you and I talked about this a few years ago. It's just this fascinating long-running question that I'm really curious about. Which is how, particularly with the perspective of the last five years in the background, how do you think about the politics of energy prices now? That old adage of "the cure to high prices is high prices." Do high prices end up driving investment in fossil fuel, or do they end up driving diversification away from it? In other words, do high prices cut both ways? What would you say is the evidence over the last five years?

Alex Grant:

Firstly, on Dieter Helm, I've never actually met him, but he's one of my personal heroes because I've read all his books. I'm sure he's explained the LCOE debate much better than I have here. But the way I would try and explain it as well is if you think to 2050, we forecast that the amount of energy we will use will be similar to today. Because we forecast in a net-zero context and a number of different scenarios, but we will get much better at energy efficiency. We will have a system where we will use exactly the same amount of energy as today.

Jason Mitchell:

Can I butt in here?

Alex Grant:

Yeah.

Jason Mitchell:

That sounds like it runs against the Jevons paradox.

Alex Grant:

Well-

Jason Mitchell:

Would you say it does or not?

Alex Grant:

Well, it does if prices come down.

Jason Mitchell:

Okay.

Alex Grant:

But yes, if we're going to get to net-zero on scenarios, one of the things we need to do is become much more efficient in our consumption. I agree with you, but let's just assume that happens. We're going to use the same amount.

The amount we're going to need to invest in the energy transition, you can take different forecasts and not mine, but anywhere between two, three, four times more per year for the next 20 years in our energy system to get to net-zero. We're going to invest two, three, or four times more per year every year to product exactly the same amount of energy and it's going to be cheaper.

I just don't understand, in that system cost, how people can come to that conclusion. There is a narrative, of course, once you've built it, well, the input costs are very cheap. The op-ex, the wind's free and the solar is there. That's a nice narrative, but people need to get paid back for the capital they invest, which is two, three, four times. If you factor all of that in, it's very difficult to see how this energy system is going to be cheaper. It's still something we need to do because it's going to be an energy system that doesn't emit CO2 and that is extremely important. But cheaper, I struggle with. That's the energy system costs that come in.

Jason Mitchell:

Can we talk a little bit more about the demand picture? Can you flesh it out? In the sense of how you see power generation changing. I guess I think about the growth in data centres, AI technologies driving power consumption. I think interestingly, the IAA published a report, this is two months ago, and this is just data centres. Data centres account for 1.5% or 415 terawatt-hours in 2024. They expect that to more than double to 945 terawatt-hours in 2030, and then go to 1200 terawatt-hours by 2035. Again, primarily driven by AI applications.

We all, I'm sure, know of a lot of the other anecdotes. Eric Schmidt, former CEO of Google, recently told Congress that "AI could eventually use 99% of the world's electricity," which is up from 3%. But I think for me, that is the big change or one of the big changes over the last five to 10 years. The fact that energy demand has been roughly flat, maybe even smalled down because of energy efficiencies over the last two decades. Then suddenly, you now have one, two, even two-and-a-half or three percent growth in developed countries. Certainly, much more in developing countries.

Alex Grant:

Agreed. We've had this challenge over the last five years to decarbonize an energy which hasn't really grown, at least in the developed world. Now looking forward, we've not just to decarbonize an existing system, we've got to decarbonize an energy system that we're going to predict is going to increase significantly in consumption, like data centres, et cetera. It is an even bigger challenge.

I think when you think about the power sources for that, the sources of supply. I've talked about the demand side, which is important and demand moderation. Then we firmly believe that diversity is all important. We need diversity of sources. We need diversity of geographies, diversity of technology types, diversity of storages to provide because it's that diversity that will lower the systematic risk, if you like.

For me, that's another thing where I see it slightly different from what a lot is talked about when it comes to energy security. A lot of what I see when people are saying energy security is we're going to stand up and we're going to wean ourselves off or never been dependent again on that Russian dictator, or whoever it may be. That is a part of it, of course. But energy security is for me is having energy when you need it. That you don't have blackouts. That you don't have massive queues at petrol stations or runs. Energy security is having energy.

For that, one part is of course making sure you don't get disruptions from dictators to the east. But another part of it is making sure you don't get other types of disruptions because of lack of storage. Or because you've decided you only want a certain type of supply that gets affected. Diversity of supply is all important. Not just supply from your own country. The more inter-connectors we get, the more other supply sources, of course from friendly nations better, the more secure and more energy security we're going to have. Never be reliant on one source, whether that be from a country or a technology.

Jason Mitchell:

I can't help but ask. How would you answer the question of the Spanish blackout? I guess critics would say an over-reliance on renewable and ambitions to drive everything by effectively green nanny.

Alex Grant:

Yeah. I honestly do not know at this point. One of the things that upsets me a little is if you're on one side of the debate, you've already decided what the conclusion is, that it's too much renewables. If you're on the other side of the debate, you've decided on we see some stuff coming out that's got nothing to do with a level of renewables. It's the investments grid, and actually it was the gas power stations that didn't come across. We just need to see those reports and studies being done. Let's see what comes out. Actually, I think it very epitomises what the difficulty with this transition is, that people already have decided what their sides are without looking at the evidence when it comes out.

The one thing I do think we should all conclude from it is it's not good. It was a little taster. As was Heathrow, to a certain extent. It's a little taster for what energy security actually means. We do not want to have these things. We need to make sure we come pragmatically and logically to the right conclusions of how to prevent them, not what is our idealistic bent on it.

Jason Mitchell:

Yeah, you're absolutely right there. Dieter Helm, in that last podcast, made another interesting point. In that renewables, and I guess nuclear to some degree, what they're really doing at the moment is only coping with the increase in demand for energy. In other words, renewables aren't actually coping with the energy transition from fossil fuels. I'm obviously familiar with the Vaclav Smil evolution in energy from wood to coal, from coal to oil, oil to gas, and gas there on. But I guess what Dieter's saying really struck me, because he's essentially saying that there is no transition. At least, in a UK context.

Now I've seen global data that seems to tell, in a different way, where investment, and to be clear that's investment not power generation, in the energy transition has certainly outpaced in fossil fuel supply over the last five years. It's more than two trillion for 2024. It's grown at more than 10% cager.

But how would you frame the energy transition's progress? Is a transition actually happening, or is the renewable energy that we are building simply supplying incremental energy demand?

Alex Grant:

When you look at the data so far, renewables is supplying the incremental energy demand. Just as, from bio to oil, it's supplied the incremental. From oil to gas, it's supplied the incremental. It's always been that way in the transitions before. We use as much wood now as we did back before the industrial revolution. We use as much coal now as we did before. Each new source, oil, gas, has just come to supplant on top. It's not reduced the one below. It's been the same thus far in renewables.

I don't think that means the transition isn't happening. It just shows the scale of how far we've got to go and how much we have to replace. It needs more investment. It needs greater build out of renewables. And it needs the recognition that in doing that, there is another cost of keeping our system stable and flexible enough to cope with the renewables. The scale is just massive.

To give you an example. We signed an agreement yesterday with Centrica to supply five BCM of gas into the UK per year for 10 years. It's a big thing us, it was a big thing for Centrica. Our CEO came over to sign it with the CEO of Centrica and it's picked up a bit of news. But I bet you the majority of your listeners won't have picked it up or heard it because it wasn't exactly front page or covered on any podcasts, et cetera.

Jason Mitchell:

Except for this one.

Alex Grant:

Except this one now. But the energy supplied in that deal from that one contract per year is more than the entire amount of energy supplied by the UK offshore wind portfolio that sits there today. From one contract that we supply with one company into the UK. But I think people think, "Oh, well, renewables is at 50%, therefore it's already halfway there." Well, first of all, it's 50% of 20%, because electricity is only 20%. Secondly, it's when the wind is blowing. When it's not, you need other sources.

There's just such a huge way to go. Again, don't misinterpret me of saying that we shouldn't do it, it's just recognising the scale of that challenge. My worry is if you push it without the flexibility, pushing the flexibility at the same time, and you get a blackout or you get those big spikes in prices that come when you don't have the flexibility, people will see that cost or see that blackout and there will be a backlash against building out more renewables. That would be very detrimental. Keep building it, but recognise the other costs and push for flexibility side as well.

Perhaps the other thing I should mention. We talk about wind and renewables a lot in decarbonizing. There are a lot of other things that decarbonize when we come to the overall diversity of energy mix. You mentioned nuclear previously. But another one where UK is in the lead and we are proud to play our small part is in carbon capture and storage. It's trying to decarbonize some of these fossil fuels.

Gas in and of itself is not bad. Oil itself is not bad. Certainly, the energy producers is not bad. The energy producers is fantastic and has led to an increase in world standard of living across the world because of it. What's bad is the CO2 that comes from it when it is burned. That's what we need to focus on, the bad CO2. Well, if we can do something about that at a cheaper price by taking it, and putting it in the ground and storing it there, why wouldn't we do that if that's the cheaper way to supply energy? I think it's just one of the mix, but we are showing we can bring those costs down. The UK is very much at the forefront of that.

Jason Mitchell:

Yeah. You've characterised net-zero by 2050 as Equinor's guiding star, with the important caveat that the transition will be bumpy and have turns. One of the problems with that caveat I think, and I think you'd agree, is the more that the short term targets end up slipping, the more back end loaded and obviously tougher longterm net-zero targets become. When you talk about these bumps and turns, can you talk about one of these turns? Specifically, scaling back Equinor's renewables targets by 2030 by around 20%. And specifically, can you maybe dissect some of the pressures from a cost to capital perspective and a lower returns profile? Maybe talk about some of the pressures that the industry have seen.

Alex Grant:

Yeah.

Jason Mitchell:

Obviously inflationary pressures, build and material pressures, et cetera.

Alex Grant:

Yeah, good question. As a company, Equinor, it is our guiding start and it is still there. It is not easy. As you say, we've moved our targets recently. We have a number of different stakeholders. We have our shareholders, we have our major shareholder, we have institutional shareholders. We have our employees. We have general society. Regulators and governments. A number of different stakeholders who are asking different things of us and sending different signals.

One of those, our institutional shareholders, how do we measure the signals from them? Two ways. One, qualitatively.

We meet with them and they tell us what they want, which we take into account. Of course, they own us in small ways. Some things we think, "Ah, we've got to think about that more." Some things, you have to have your plan. If you try to satisfy everyone, you'll satisfy no one. But we listen qualitatively. The second thing we do is we look at what happens to our share price when we do certain things. Because that is a measure of, if people don't like what we're doing, they sell our stock. And if people like it, buy our stock. On that latter measurement, investment in renewables from oil and gas companies is not wanted at the moment. When we announce that we want to spend more in that area, our share price goes down. Not just us, across the industry. And less share price reacts well.

While you might talk as well about the financing industry with its wealth of capital behind to invest in renewables, there's another side that is show where they want to spend our capital by the steps they take in buying or selling our stock. Now, it's just one part of it and that depends on a number of different things of why they think that at the moment, which we can go into if you want. But it's clear that that is the case. We have changed our target somewhat. A lot of others have changed them a lot, lot more on the back of the signals that they're getting from their owners, the shareholders who own the companies.

Jason Mitchell:

Yeah. Look, it's refreshing to hear the contours of these pressures. Maybe can you dig into how the cost of capital has been reshaped over the last three, four, five years, and what that's done around the economic incentives to build new capacity?

Alex Grant:

Yeah. If I try and describe how we internally look at different investments, I'll do it relatively simply otherwise I'll go on for ages. Oil and gas, we have our hurdle rate, the type of returns we want to make, and then we might make adjustments for those returns for country risk. If it's in a certain country or we see other risks, we might want a slightly higher return. If it's in a different one, we might want a certain lower. But a set way.

For renewables, we have another return that we want to make. That return essentially was much lower. Well, why is it much lower? A dollar is a dollar. Because our view on renewables, and let me use in this example offshore wind, is that we kind of know how much on average wind is going to blow. We might not know day-to-day, but in a year, you pretty know how much. Compared to oil and gas, where sometimes you might produce half as much as you planned or it might be double. Here, you pretty know. You know exactly what your price is because it's given in a CFD by government. And it's inflation linked, so you don't have exposure to inflation. And there's no cost, operating cost, because the wind blowing is free. And when you build it and put these things up, it's less complicated. It's still big projects, but you're putting up similar wind farms again and again.

It's just an inflation linked, isn't it? You've got very little costs, you've got some construction risk, and then you've got an inflation linked revenue line that you know what it is backed by the government. If we get a return that's a few percentage points above an inflation linked bond, that's a good return. Let's price it that way.

A couple of things have happened. The first is that risk-free rate, the underlying piece in which you do it, has gone up massively. That disproportionately affects low discount rate projects compared to high discount rate projects because as a proportion, they've gone up much more significant. Look at how inflation linked bonds have priced over the last five years when interest rates have gone up. Anyone with an inflation linked bond portfolio has suffered significantly. Priced like that, wind, especially if you view it that it's like a geared inflation linked bond, has suffered significantly. That's one.

The second is that maybe we're realising that the risk premium above is not quite so low. Perhaps there are a few more risks around than we thought. Just look at the experience we've had in the US around Empire Wind, where things are back on track. We've worked very well actually with the US government to get there. But nevertheless, there are political risks and other parts of the world. Maybe the risk premium is a little higher everybody thinks than they first thought. You add that on top, then you start getting to higher discount rates. When you apply a higher discount rate to the same cashflow, you get lower valuations.

Jason Mitchell:

Yeah.

Alex Grant:

Investors have done that on our stock and we've done it on our projects. It's meant that it's much harder to get the value out of the projects than we saw a few years ago.

Jason Mitchell:

Do you remember the Energy Transitions Commission issued a report last year called Overcoming Turbulence in the Offshore Wind Sector? Basically, saying that these inflationary pressures would dissipate, i.e they're transitory.

Alex Grant:

Yeah. Okay, it's a good point that you raise, the third one, that I forgot.

Jason Mitchell:

Yeah.

Alex Grant:

Which is the cost of the materials to build things has gone up significantly. Steel, et cetera. I think we do see that moderating somewhat now, that the costs are going up less, but they're not going down. They've risen a lot and they're staying high. Maybe they're rising still a bit. Maybe the inflationary pressures have dissipated, but that means that the costs that have built up in the business are theirs to stay. Unless they were forecasting that we'll suddenly get deflation, which I don't think anyone is forecasting at the moment in materials.

Jason Mitchell:

Given you other title is global head of crude products and liquid trading at Equinor, how do you read the language around "drill, baby, drill" in the US? The rhetoric coming out from the US Administration and what it means for global energy markets. I'm not obviously looking for a political statement. I guess I'm just trying to understand the logic from an energy major perspective.

It was interesting. A Goldman Sachs analysis a few weeks ago came out which made the observation that Trump is essentially solving for a 40 to 50 dollar per barrel, and that's WTI, price range based on his, I think more than 900 social media posts. But at least, from my perspective, one of the big lessons over the last five years, certainly coming out of COVID, is that the energy industry, specifically the oil industry, will prioritise profitability over incremental production.

Alex Grant:

I kind of just agree with your conclusion. I don't think that the companies in the US are prioritising production over cashflow. They're certainly not saying they're doing that and they're coming out. "Drill, baby, drill" is if prices are high. They're not at the moment. We've seen rig rates drop off significantly. At the moment, there is no lack of crude oil in the world. There is far more being produced than is being consumed. The excess at the moment, maybe it be anywhere between 400,000 and 700,000 barrels a day. Which, when we consume 100 million barrels a day, may not sound very, very much, but of course it's the theory of marginal utility. It's the marginal barrel that counts. All of that is being currently mopped up by China and stuck into storage. Whether that is commercial storage or strategic storage, it's a big question and a political one, but there is a lot of crude. As a result, the prices are higher. Mainly, bigger driver for those low prices has been OPEC raising their production.

I think it's got to levels where generally, it's speculated now that activity will reduce. We've already seen it in rig rates and frack crew rates in the US. There's a response of don't drill at these levels which are higher than Trump's 40 to 50 I think, WTI. The US marker is higher than 50 still, 55 or something at the moment.

Jason Mitchell:

Yeah, super interesting. I guess with your ex-banker hat on, to what degree are capital markets rewarding longterm decarbonization? Do you think they're still too short term in their signals? Private market investors seem to be looking through, call it the cycle. In some cases, buying good quality renewable assets at considerable discounts. Over the last couple months, you saw the Canadian investor CDPQ buy Innergex, which is I think basically trading at 1.5 times book when they bought them. And was previously trading as high as 2.5 times book. KKR bought Encavis last year. Investors took our Renew Energy Global. Which is interesting, to what degree you've seen this misalignment between listed assets and real demand in private markets for longterm investors willing to look through the cycle.

Alex Grant:

Yeah, it's interesting. I don't know those cases, but I think some people will take the view that this is a good time. It's better to buy at low prices and sell at high. The prices are certainly lower now than they were last year, than they were the year before. The question of whether they will keep going lower or go up is anybody's view, but I can see why some people would take the view that this is a low point in the cycle and therefore making longterm investments.

I think the other challenge is, when you look at the oil markets as we just talked about, what's going to drive those prices to go up or down is how much is produced versus how much is consumed, and the price will adjust accordingly. The price matches the two. Demand has to equal supply overall and it's price that makes that happen.

But when it comes to renewables, what you also need to think about, renewables, and carbon capture and storage, and batteries, and all these other investments that we're in, what we also need to think about is what will government regulation be. Because if tomorrow, the UK government said "no more CFDs," or if they said "we are no longer doing carbon capture," then suddenly, those projects would have much, much lower value. There's another piece that you have to predict and decide on when it comes to decarbonization, which is what is government policy going to be. Behind that of course, governments often reflect what is societal views. Where is the politics trending on it?

Jason Mitchell:

Got it, got it. Okay, let's finish up. Last question, with a quick round of comments on where technological innovation and potential stands across a couple of technologies that I believe Equinor is involved in. I've got five or six of them. Let's start off with clean hydrogen, blue and green.

Alex Grant:

Clean hydrogen, blue and green, both very good, very promising, both expensive. How much can you bring down the cost curve? I feel like I'm an old record here. Their value is not just in the energy they provide, it's that they can provide it when people need it. It's a combination of energy provider and a battery, and a longterm battery that can be stored for a while. What is the value of that storage? It doesn't matter that they are more expensive somewhat because they have this extra value. But at the moment, they are still quite high. Expect costs to come down, still a believer in both. Blue much cheaper than green, but hopefully green will get there over time.

Jason Mitchell:

And commercially viable, would you say 2040, 2045, or further out?

Alex Grant:

It depends. Are you predicting a lot of politicians that electricity prices are going to be significantly lower in 2030 and 2040? If so, it will take longer for these things to be commercially viable. Or are you predicting that the energy system is going to be more expensive and there's going to be more cost? In which case, these things will be commercially viable quicker.

Jason Mitchell:

Got it. Okay, second. Long duration energy storage batteries.

Alex Grant:

I don't know enough about the technology in batteries, in terms of lithium, et cetera. That would be the most fantastic breakthrough. If we get breakthrough of longterm batteries, that solves all of this system flexibility, intermittency. Don't don't as much gas or hydrogen, or anything else. Just build out renewables, product electricity, store it in batteries. As far as I know, that's still quite far off, but if that comes, that would be fantastic.

Jason Mitchell:

Got it. Then CCS, maybe in context of I know you've made some progress from a Northern Lights perspective and some other projects.

Alex Grant:

Yeah. CCS, a proven technology. We've been doing it for over 30 years. Mostly in Norway, now starting in the UK. Again, it's about bringing the costs down. When you look at those costs, still need to bring down. Need a carbon tax or ETS as we have it to make it that you don't need subsidies from government, that it will just be covered by the carbon cost. I believe we'll get there as we build this out and get more diversity. It is a much more economically feasible route that we see today, than say green hydrogen or longterm battery storage.

Jason Mitchell:

Got it. What about synthetic fuels? In other words, E-fuels or liquid fuels made by combining green hydrogen with captured CO2?

Alex Grant:

It's fantastic. Maybe the people that use them are going to be able to afford to pay for them more. We're certainly looking at it, different areas. Affordability, if you can afford to fly in a plane, maybe you can afford to pay more for the fuel, rather than your house in the winter. But just as an example, ESAF, sustainable aviation fuel, it's exactly the same fuel. It doesn't make the plane fly faster or whatever. You can mix it with current fuel put it in, costs eight times more, nine times more to produce. We're not talking it's a 30% more expensive product. It is 800 or 900 percent more expensive product. But maybe can afford to pay more for it, but that's quite a lot more.

Jason Mitchell:

It's a premium.

Alex Grant:

At that price, if we don't bring it down and you used 100% SAF, double the price of your plane ticket.

Jason Mitchell:

Yeah. Last one. Green ammonium.

Alex Grant:

Green ammonia, similar to green hydrogen. Great advantages. You can transport it around so you can produce it in areas where it's cheaper to produce and you can transport it to areas that can afford to pay for it more. For example, we look at projects where we'll product it in the US and it will be consumed in Japan in power stations. It has some good advantages. It is expensive. Green hydrogen, and then you're converting it again. You're losing, from start to finish, from your renewable energy that you could consume as electricity, by the time you've converted it to green hydrogen, to ammonia, shipped it, burned it again, albeit not emitting CO2, and creating electricity again, you've probably got, people would tell me that this number's up, but I'd say 20% of the electricity that you started with. That's quite a lot of losses along the way. Which is fine, it just means it's expensive again. But all these things, the product costs are coming down. We need to do them to bring them down, but not cheap.

Jason Mitchell:

Got it. Look, it's been fascinating to discuss the state of the energy transition, the trade-offs that we're increasingly facing between security of supply, affordability, and the decarbonization, and emerging energy technologies. I'd really like to thank you for your time and insights. I'm Jason Mitchell, head of responsible investment research at Man Group, here today with Alex Grant, Equinor's senior vice president and UK country manager. Many thanks for joining us on A Sustainable Future. I hope you'll join us on our next podcast episode. Alex, thanks so much for your time. This has been a great conversation.

Alex Grant:

Thank you very much.

Jason Mitchell:

I'm Jason Mitchell. Thanks for joining us. A special thanks to our guests, and of course, everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast .