Smaller-scale companies make up most of the global economy and for that reason the entire energy transition hangs on their ability to come clean. But small and medium-sized enterprises (SMEs), as they are known in the jargon of bureaucrats, often have limited resources. Many will need extra help to meet decarbonisation goals

Much attention has been paid to how blue chip companies — the likes of Apple, Google, Facebook — are decarbonising their significant and power-hungry operations. Energy majors like Shell, BP and Total are also making loud noises about becoming greener, with stated intentions to transform their traditional business in the hope of staying competitive and relevant in today’s energy landscape. Even clean energy technology producers, like wind turbine maker Vestas and electric vehicle company Tesla are delivering answers on how to decarbonise business.

The focus on big names in their relevant sectors, however, ignores a fundamental truth: the wheels of the global economy are just as reliant on businesses that are classed as small or medium enterprises (SMEs) as they are on large conglomerates. In Europe, 99% of companies are deemed to be SMEs. Globally, they represent around 90% of businesses and more than 50% of employment, according to the World Bank, with even higher ratios in the developing world. The data speaks for itself: decarbonising SMEs and assisting those working to decarbonise the economy will be pivotal to the success of the energy transition. Yet it is SMEs that are suffering acutely in a global economy made fragile by restrictions on the movement of people to hinder the spread of the covid-19 virus. For them, financing investment in transitioning to clean energy has become particularly difficult.

“In Denmark, [SMEs] are core to the energy transition,” says Troels Ranis of lobbying organisation DI Energy, part of Dansk Indusri, the Confederation of Danish Industry. “About 99% of Danish industry is made up by SMEs and many of them are very small companies — up to 50 employees.” The ratio is similarly high in the industrial powerhouse of Germany, according to Sebastian Bolay of the Association of German Chambers of Commerce and Industry, known by its German initials, DIHK.

Germany is targeting a 65% share of renewables by 2030, while Denmark is looking to cut emissions by 70%. Bolay and Ranis both agree these milestones cannot be met by the conglomerates of industry alone: the participation of SMEs is essential to achieving the goals. As a group, SMEs should be able to decarbonise more quickly than large enterprises as they are often less burdened by bureaucracy and shareholder demands.

“SMEs are agile. They can turn more easily than a lot of larger companies so they can act very quickly. They could be the best available example of how to achieve carbon neutrality very fast”

AGILE ADVANTAGE

“[SMEs] are agile. They can turn more easily than a lot of larger companies so they can act very quickly. They could be the best available example of how to achieve carbon neutrality very fast,” says Ranis.

“SMEs know what they need, they can tailor themselves to systems they need,” adds Bolay. “They know how much electricity they need and when they need it. This is beneficial not only for their green image but also on a cost basis.”

Smaller firms are prime candidates to provide real-world examples of decarbonisation efforts and spread knowledge, both in terms of cost impact and how different technologies work in different industries, Ranis explains. Their size, however, can also work against them. “They often have limited staff resources to deal with these things. They also need to have help mapping the decarbonisation potential,” he says.

CAUGHT UNAWARES

The scale of the task in supporting SMEs in the transition is difficult to quantify. A survey published in early 2020 by the UK’s Carbon Trust, a clean energy advisor, found that many SMEs — in the UK at least — are yet to fully appreciate the importance climate change will have for their business and the need to focus on decarbonising their activities. Nearly two-thirds of the respondents had not measured their carbon footprint.

The research also found that most of the SMEs surveyed were unaware of how climate change would affect their business, although all will be affected. Nearly half surveyed cited money and time as barriers to implementing climate-related policies.

At the top of the list of suggested support, SMEs asked for more access to funding for grants, training opportunities, and expert advice, according to the Carbon Trust.

“We have a lot of new ideas, but as many other countries, we have challenges through the valley of death to bring these ideas to market sufficiently. When it comes to new start-ups and small SMEs, we need to do even more in Denmark in order to ensure the future pipeline for the energy transition”

RECOVERY EFFORTS

SME efforts to decarbonise have been made harder by the covid-19 crisis. “To kick start the economy again we need to have an SME focus in Denmark and this probably also goes for the EU in general,” says Denmark’s Ranis.

SMEs can participate in the EU’s recovery by accessing the €750 billion Green Deal and recovery fund negotiated by national governments in July. In the first half of 2020, business consultancy EY carried out research looking at “shovel ready” green projects that have the potential to create social, environmental and economic value. EY’s research found 30% of the projects identified for the bloc’s support involve SMEs.

“SMEs have a significant importance,” says Steve Varley, the new global head of sustainability at EY. “We have found that some of the smaller companies — the S of the SME — do not have the infrastructure to unpick the process and parameters to apply for the funding. We are hoping that the EU has a special focus on SMEs because we think they will have a disproportionate role here.

“The [EY] study was good in saying that SMEs have a hunger and energy to contribute in this area of a green recovery and jobs and they have got as big a voice as the bigger companies. We should hope the EU puts in place parameters that lets companies draw down on the funds, even-handedly.”

SUPPORT SYSTEMS

To support SMEs that have been affected by the pandemic, the United Nations Economic Commission for Europe (UNECE) has published guidelines and best practices for SMEs of all sizes that provide energy-efficient products and renewable energy equipment. It analyses the environment facing these smaller firms and offers examples of best practices for crisis response and recovery.

UNECE also lists recommendations for governments to help smaller firms during pandemic-constrained times, including tax breaks, wage subsidies, and grants. Currently, SMEs in Germany can receive government grants to cover 80% of energy audit costs. Audits offer companies suggestions for possible measures to boost energy efficiency.

INNOVATION INCUBATORS

As the EY report stresses, SMEs are a hive of new innovation and entrepreneurship. “The German SME sector has always been innovative. Many companies are still family owned; there is a strong patriarchy in the companies, but if the boss is up for innovation of course this affects the company’s performance,” says DIHK’s Bolay.

New companies focused on storing electricity in hydrogen gas and batteries are emerging across Europe and attracting serious government attention. But they are a long way from becoming successful, long-term businesses.

“We have a lot of new ideas, but as many other countries, we have challenges through the valley of death to bring these ideas to market sufficiently. When it comes to new start-ups and small SMEs, we need to do even more in Denmark in order to ensure the future pipeline for the energy transition,” says Ranis.

“We need the SMEs no doubt. We still need — and will do for decades — these large companies. But we need to engage the large companies with their value chains, the SME segment, much more in order to have a renewed technology or product pipeline”

SUPPLY CHAIN GRIEF

Many SMEs, especially in Germany and Denmark, rely on exports for much of their business. “We are doing well in exporting green technologies and services. Since 2000, there has been an increase in export of these products. It’s made up primarily of SMEs,” notes Ranis. “But now they are hit by covid-19 and we need to work our way out of this disaster in the international economy. Half of the Danish economy is made up of international exports so many of Danish SMEs are exporters and will feel the trouble, especially now that last year’s orders are running out,” he adds.

Bolay notes the challenge for small companies is also seen within the renewable energy business. “We need the huge [offshore wind] farms, made for the big investors like RWE or Innogy, but we also need the smaller-sized companies and private households investing in rooftop PV. Otherwise, our goals are very ambitious,” he says.

About 80% of SMEs are investing in renewable energies, racking up billions of dollars in additional investment to install new capacity on top of what the larger developers have achieved, adds Bolay.

“[To reach] the 65% goal, we need to double the amount of installed PV capacity and add 15 GW of onshore wind in the next ten years and replace many old wind turbines. So there is a huge need to invest heavily and this is only possible with SMEs. The 65% target is not possible without the involvement of SMEs and private households,” he adds. Germany has around 50 GW of installed solar PV capacity, and 55 GW of onshore wind.

Ranis agrees. “We need the SMEs no doubt. We still need — and will do for decades — these large companies. But we need to engage the large companies with their value chains, the SME segment, much more in order to have a renewed technology or product pipeline. If we want to be a game changer and also leading within Power-to-X, for example, we need Ørsted, no doubt, but we also need new companies that can be a part of the industrial value chain if it is to be built up in Denmark.”

TEXT DAVID WESTON

Read more in-depth articles and expert opinion pieces on the global transition to a decarbonised energy economy at FORESIGHT Climate & Energy

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FORESIGHT Climate & Energy is the essential read from Denmark on the global transition to a decarbonised energy economy

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