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Maritime and energy sectors will transform through green fuels and balancing power

23 August 2022 in Videos

As the shipping and energy industries face the biggest regulatory and market transition in 30 years, Wärtsilä’s CEO calls on leaders to accelerate decarbonization in an exclusive IMD CEO Dialogue....

The chief executive of one of the world’s leading power technology and services provider for the maritime and energy industries has called on governments, companies and other stakeholders to speed up decarbonization in these two sectors that account for roughly a third of the world’s carbon emissions.

Håkan Agnevall, President and CEO of Wärtsilä, the global group headquartered in Finland, told IMD President Jean-François Manzoni that the maritime and energy industries are facing the biggest transformation in more than three decades as asset owners come under regulatory and market pressure to decarbonize for the future.

“The marine and energy sectors will, in the coming 10 years, go through a revolution. It’s all centered around decarbonization … There’s going to be more things happening in marine and energy in the coming decade, compared to the previous 30 years,” he said in the latest edition of IMD’s CEO Dialogue series, which showcases insights from influential business leaders in diverse industries.

The industrialist added: “We are moving too slowly on the global decarbonization journey, and we need to accelerate. Energy production accounts for 30% and shipping for 2% of global carbon emissions. Both sectors need to decarbonize at speed to be able to achieve the Paris agreements emission targets”.

To put those figures into further context, 90% of the world’s transport takes place at sea, but only represents 10% of the transport industry’s total carbon emissions, meaning that maritime has the lowest carbon intensity of any individual transport sector.

Because most of the world’s ocean-going ships travel vast lengths between ports, Agnevall said battery power is not a feasible solution. As an alternative, shipping companies such as Maersk and CMA CGM are considering carbon-neutral and zero carbon fuels made using renewable energy.  

In the energy sector, renewables will grow exponentially to decarbonize power systems across the globe. As the share of intermittent renewables grows, balancing power will also grow to stabilize the power system. Balancing power is produced by engine power plants and battery storage as complementary technologies. Here hydrogen will be an important potential fuel for the future.

The transition to greener fuels presents new business opportunities for Wärtsilä, which is developing engines that run on alternatives to fossil fuels.

However, there is little consensus on the best way forward, with different companies choosing different fuels — including methanol, ammonia and hydrogen — to power their future vessels and power plants.

Complex challenge for policymakers

As governments weigh the scope and form of regulation that could reshape global trade flows and energy generation, the Wärtsilä boss warned policymakers that there is no silver bullet for decarbonization. He also expects some international fragmentation.  

“Green is not black or white,” he said. “There is no single, simple solution. And we recognize that as well. So we clearly need to look at different alternatives. And when it comes to the energy systems and fuels of the future, it will not be one-size-fits-all.”

Agnevall predicted that retrofitting will be an important component in the sectors’ green transition, given that vessels and power plants have a lifespan of more than 20 years. Agnevall (IMD MBA 2000), insisted that fossil fuels would remain in the industry for many years to come, too.

“The avenue going forward is to blend in different type[s] of green fuels … it will not be a digital shift,” he said. “So therefore you need flexible engines, flexible drive lines that you can convert. Nobody wants to be stuck with stranded assets. And this is where flexibility and energy efficiency will be so important.”

The Swedish executive acknowledged that “these are significant capital investments. And you really need to futureproof them, make them convertible, upgradable so you can follow the transition that will come.”

The pressure to decarbonize shipping is coming from the global regulator IMO and from international companies, including Amazon and Unilever, which have pledged to use only zero-emission ships to transport their goods by 2040.

Managing the incentives for going green

Agnevall noted that green fuels, such as methanol and ammonia, are expected to be two to four times more expensive than traditional bunker fuels — a fact which has led to proposals for market-based measures, such as carbon levies, to make alternative fuels more cost-competitive. But the technology boss believes the cost impact on consumer durables will be modest because of economies of scale in container transportation.

“And I think both you and I would be willing to pay a couple of extra cents if we can … contribute to the decarbonization,” he told Manzoni, the Nestlé Professor at his alma mater.  “On the regulatory side, we need to create a level playing field with carbon tax systems, with other regulatory measures,” he said.

Maritime energy industry
90% of the world’s transport takes place at sea, but only represents 10% of the transport industry’s total carbon emissions, meaning that maritime has the lowest carbon intensity of any individual transport sector.

On the energy side, the cost for generating electricity using renewables is already today lower than using fossil or nuclear energy in many parts of the world. Here permitting for new installations for renewables is key. “Everybody wants green energy, but there is a tendency to say ‘not on my back yard’. This needs to change.” Agnevall says.

Founded in 1834 and now listed on Nasdaq Helsinki, Wärtsilä manufactures and services power sources and other equipment and digital solutions in the marine and energy markets. Agnevall cited synergies between the group’s marine and energy business, which has moved beyond fossil fuels and expanded into battery power and storage.

“If we’re going to have the slightest chance to reach the Paris Agreement goals, we need to shift the global energy system to renewables,” he said. “And you could say two of the main ways forward [are] wind and solar, [which] will grow exponentially in the coming decade.”

Balancing power

However, he said the intermittent nature of wind and solar power underscore the need for back-up generating capacity; Wärtsilä’s highly flexible power stations can be quickly ramped up or down to smooth out fluctuations in supply and demand.

“This is when you need balancing power, and this is where we come in with our dispatchable power to balance the whole grid so that renewables can grow while still having a stable power system,” the chief executive said. “So it’s a key enabler for decarbonizing the whole energy system. Our engine power plants and our battery storage systems are complementary technologies that provide balancing power for different time domains. Battery for shorter fluctuations and engine power plants for longer power swings.”

Services, meanwhile, are an important part of the Finnish group’s business model, with about half the €4.78 billion net sales for 2021 coming from after-market services including parts, maintenance, retrofits and different type of service agreements.

“We talk about moving up the service value ladder, unlocking value for our customers,” Agnevall says. The company is leveraging data analytics for performance-based service agreements — a strategy that aims to work out the root cause of equipment failures to reduce unplanned downtime, energy consumption and emissions for customers.  “The secret of the sauce of a successful service business is how you combine great products with great people and a great culture.” he says.

Everybody wants green energy, but there is a tendency to say ‘not on my back yard’. This needs to change.
- Håkan Agnevall

Although many firms are raising pay to recruit and retain staff in a tight labor market, the industrialist cited a shift in expectations as employees strive for purpose. “We talk about our purpose [of] enabling sustainable societies through innovation in technology and services. We can have a significant impact for our customers and also for the future of the world. And we are bringing the latest technologies to do so. That attracts talent.”

Agnevall himself joined Wärtsilä as CEO in February 2021 from Volvo Buses, a subsidiary of the Swedish commercial vehicle maker where he was president for eight years. He took the helm at Wärtsilä at a unique time for the group, with a tough market situation heavily impacted by the pandemic.

Making a difference as a leader

The chief executive reflects on the multitude of demands placed on leaders of public companies. He said this requires “razor-sharp prioritization” to get more things done in in less overall time. “You need constantly to ask yourself: ‘Why are you doing this?’, ‘Is this giving you the greatest lever on your time?’, ‘Are you trying to do too many things in parallel, increasing overall lead times?’. You know the expression ‘don’t boil the ocean’?”  

He also underlined the importance of being a team player. “Never forget the people on your team. Stop. Listen to people. Talk to people. Interact with people. Because it’s so easy to get distracted into the next strategy, to the next board meeting. And then we run constantly. We need to stop and be there for our people, and this is challenging … but this is something I’m working [on],” he said.  

At 55, Agnevall’s long spell in the industrial sector includes stints at ABB, the Swedish-Swiss power and automation conglomerate, and Bombardier, the Canadian rail transport manufacturer. He has not coveted high-profile positions, he said, instead choosing roles with a good match to his change leadership experience and personal values, turning others down.

“The key for me has been to [find] the context where you think you can make a difference, not chasing maybe the CEO title … but seeking those opportunities where, with your experience, your knowledge and your cultural fit, you can really see and feel… ‘Here, I can make a difference, I can contribute.’”

Under his leadership, Wärtsilä’s performance has improved in difficult conditions. The group reported comparable operating profit of €65 million in the first quarter of 2022, a 61% increase on the year before and roughly in line with analysts’ estimates. Net sales rose 30% to €1.23 billion, ahead of forecasts.   

At a time when the Finnish group is facing uncertainty because of Russia’s invasion of Ukraine, soaring commodity prices and Chinese coronavirus lockdowns, the after-sales service market provides an avenue for profitable growth.   

“The macro environment these days includes a lot of uncertainties,” said Agnevall. But he remains bullish.Wärtsilä is providing cutting edge technology and services that will be key for the decarbonization transformation of maritime and energy in the coming ten years. You could say that we are part of the problem, but we are also part of the solution. We really believe that we can make a difference for the future, working together with the stakeholders of our industrial ecosystems.”

Expert

Jean-François Manzoni

Jean-François Manzoni

IMD President

Jean-François Manzoni is the President of IMD, where he also serves as the Nestlé Professor. His research, teaching, and consulting activities are focused on leadership, the development of high-performance organizations and corporate governance.

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