Cameron Tandy | Managing Director | Resources | Accenture Africa | mail me |
To date, policymakers, regulators, the scientific community and even consumers have had to step in to close the economic gap between the hydrocarbon energy system and the low-carbon system.
This transition is an energy system transition, not a supply-centric one, and it is distinguished by placing decarbonisation at the core.
Our analysis has confirmed the importance of collectively adopting a pragmatic, commercially investable, action-oriented approach to tackling emissions – all with a clear focus on executing the move at scale.
Time is of the essence. Companies that act now will not only lead the decarbonisation charge toward 2050, but also reposition for commercial success for many years after.
Further, we have identified four variables that will determine the success of the decarbonisation transition: new infrastructures; new technologies and ecosystems; new markets and regulations; and new behaviours and customers.
Variable 1: New infrastructures
The pace of the current decarbonisation transition – like all transitions that came before – will be largely determined by how quickly a new infrastructure can be created to support the processing and distribution of the incoming energy supplies.
The new infrastructure is needed to meet the changing needs of low or net-zero emissions oil and gas production; support future fleets of electric vehicles (EVs) and hydrogen-powered mobility; accommodate the addition of variable renewable power (VRE) through increased grid flexibility and dispatchability; and support production of new fuels such as biofuels.
The majority of low-carbon investments have been either small (<$100 million) or modular collections of individual assets complementing existing assets and infrastructures.
The model for larger clean energy projects, or those exceeding $5 billion, has only recently started being tested and refined, with the progress made in solar power a relevant example.
The levelised cost of energy of utility-scale solar photovoltaic (PV) energy fell 13% in 2019 compared to 2018, taking the average cost down to $0.068/kWh.
Additionally, a fall in onshore and offshore wind over the same time period by around 9% resulted in average costs of $0.053/kWh for onshore and $0.115/kWh for offshore for newly commissioned projects. On a project level, records were set in Portugal for solar ($16/Mwh) and in the UK for offshore wind ($50/Mwh).
The ‘success’ stories we’re seeing in solar and wind will have to be repeated across all major parts of the future energy system – with new infrastructures to support rapid buildout of hydrogen, electric vehicle (EV), CCUS, renewable and bio-based fuel solutions.
Overall, most of the $90-105 trillion investment required in the energy system through 2050 will be related to infrastructure build16 – and the ability to fund that will make or break the transition. Stimulus funding provided in the aftermath of COVID-19 may help.
Variable 2: New technologies and ecosystems
Technology and innovation have accelerated the decarbonisation transition, and the predicted performance and cost-competitiveness of renewable and low-carbon energy resources have been repeatedly surpassed.
Lower costs, in turn, have accelerated adoption. At the same time, advances in how the energy system operates, especially by leveraging digital applications, opens the door for lower-cost and more flexible solutions.
Today, we are looking to breakthrough innovations to help further the transition. Innovations that aren’t yet proven at scale or deliver the required returns are poised to Extend the Frontier of what is possible.
As noted earlier, hydrogen, electricity-based fuels, biofuels, advanced industrial processes and select negative emission technologies are leading this pack.
The key difference going forward will be the ability to scale each of these technologies – and to take them toward their ‘theoretical maximum’. That will require extensive partnerships, or the creation of an expansive ecosystem.
Neither the current energy sector, nor any adjacent sector alone, can fund the scaling of these technologies. The future technology landscape will be characterised by new types of ecosystem that include energy incumbents, technology companies and even non-traditional players such as private equity investors or cross-sector participants.
Variable 3: New markets and regulations
Our research suggests that regulations and subsidies serve as a catalyst for change and are, therefore, complementary to other efforts aimed at scaling and accelerating the transition.
Regulatory and subsidy changes have focused on removing subsidies that artificially support hydrocarbon consumption. They are also leading to new clean-air policies that impact everything from fuel specifications to municipal and industrial emissions.
In some cases, policy decisions have unlocked large markets for low-carbon projects. These projects in turn drove supply economies and led to further advances in technology and performance.
Looking ahead, regulations must also be designed with an eye toward how revenue generated from carbon or emission policies will be reinvested back into the industry for the benefit of the consumer or to accelerate critical innovation in low-carbon solutions.
Variable 4: New behaviours and new customers
Individual and business energy consumers play a critical role in decarbonisation programs. Our analysis suggests that as much as 25% of potential emissions reductions achievable through 2050 are dependent on collaboration between energy suppliers and their customers.
For segments such as light transportation and residential buildings, energy demand is driven by the individual behaviours of billions of people.
The ability to reach these individuals with messages that explain the benefits of energy efficiency will either underscore or undermine any infrastructure, technology or regulation-based action.
The investor has emerged as a new ‘customer’ in this decarbonisation transition. Leading institutional funds have become increasing vocal in their expectations that the companies in which they invest are well positioned for the transition and are leaders in delivering on ESG.
Given the importance of attracting capital, boards across the energy sector are doubling down on their transition strategies and building internal mechanisms, such as linking executive and managerial pay to emissions performance.
Getting the balance right
Previous transitions were characterised by supply shifting from one dominant source of energy to a newly abundant energy supply source – one offering clear advantages such as higher energy density, greater transportability, higher reliability, or lower extraction and processing costs.
By contrast, the future energy mix after the current transition will be characterised by lower energy density, less transportability and, in some sectors, higher initial extraction and processing costs.
Successfully navigating the decarbonisation transition is about more than achieving emissions-reduction targets and ensuring sustainability through carbon net neutrality, nitrogen oxide reductions and environmental stewardship.
Oil and gas companies must look beyond the impact of the transition within their own operations and consider how their scope of engagement across the energy sector and actions might influence or support their customers and help to architect changes in adjacent sectors.
Companies will need to generate competitive returns to attract the infrastructure investments the transition will require.
