Energy Industry Insights: The transition to a low-carbon future

VO: This audio feature is part of DNV’s 14th annual Energy Industry Insights study. It is produced by FT Longitude in partnership with DNV.

Gerard Reid:

An energy transition usually takes a generation and we're trying to do this in 20 years. It's tough, it's doable, but it's akin to sort of putting the man on the moon.

Meg Wright:

It’s a stark, yet realistic outlook for the future should the global energy transition continue at its current pace.

In this audio feature, we’re going to explore current issues in the energy industry as it evolves towards a low-carbon world.

Eirik Waerness:

The whole discussion on energy transition in a world of geopolitical conflict has put into perspective, I think, that we need to continue to develop the industry in a balanced manner, taking into account the need for energy immediately, and then also the continued need for energy, but with much lower emission profiles gradually.

So handling volatility, both in terms of supply and demand, but also in variations in cash flows. It's something that we as large companies have weathered out, if you like.

Meg Wright:

We’re also going to ask how the energy sector can capitalize on its biggest opportunities to increase momentum in the global transition to net zero.

Jacqui Bridge:

We're building assets that last in general 50 years or more. So that long-term planning is a feature of transmission network businesses, and looking ahead is not new to us, but I think what's new to us is the volume and scale of change that we are seeing and the greater uncertainty in what those changes will be and how quickly they'll happen.

Meg Wright:

I’m Meg Wright, head of innovation at FT Longitude. Welcome to this special episode of DNV Talks Energy.

Meg Wright:

So, how are energy industry professionals feeling about the year ahead?

DNV’s 14th annual Energy Industry Insights study reveals strong levels of optimism about the industry’s growth trajectory. Even if the pace of the transition has slowed in recent years.

Eirik Waerness:

Global emissions fell by 8% in 2020. If we are to reach the goal of one and a half degree, they have to fall by roughly 8% per year every year from now to 2050.

The reason they fell in 2020 is that we crashed the global economy. We banned transport, basically, told people to stay home. We used 20 million barrels per day less oil in April 2020 than we did April the year before. So crashing the global economy is a possible way of reaching carbon budgets, but it's not a way I would recommend.

I'm Eirik Waerness. I'm the Senior Vice President and head of Global External Analysis and Chief Economist in Equinor.

In our forecast, we think the world is on a path which is consistent with roughly 2.2 degree warming by 2100. And that's in a situation with a lot of geopolitical conflicts, with a lot of delays, with much slower development than what we ideally would've seen. But at the same time, with a lot of policy changes and technology changes moving in the right direction. It's a much more optimistic scenario than we saw just a few years back. But it's very far away from a one and a half degree world.

Meg Wright:

Indeed, the energy sector continues to face compounding challenges: from record-breaking energy prices to geopolitical turmoil and ongoing market volatility.

All this, of course, is underpinned by growing urgency for emissions reductions and increasing pressure from customers to meet demand in a climate-friendly way.

Gerard Reid:

If we look at the energy transition over the last, let's say 15 years, it was regulatory driven. Government would put in a feed-in tariff and people would build wind parks. Right? You put in a feed-in tariff and people would put in solar on the rooftop. That's what drove it. But now, we've gone beyond that.

My name is Gerard Reid. I'm founder of Alexa Capital, which is one of the leading investment banks in the energy transition area. And I have been involved in financing everything to do with energy for the last 20 years.

I think the biggest change since the outbreak of the Ukrainian-Russian hostilities is that the customer now is saying, "I want change and I'm going to make change happen myself despite what my neighbour does, despite what the grid operator does, and despite what the government does." And they can do this because the cost of these technologies are just so low.

Meg Wright:

As Gerard explains, for renewables companies in particular, these factors are contributing to a volatile market landscape; one that has led to a drop in both share prices and levels of optimism among some of the sector's biggest actors.

To understand this, he says we must consider the different parts of the entire supply chain.

Gerard Reid:

So if we look at the manufacturers and whether you're solar, wind or batteries, what you're doing is, and it's been going on for years, it's been a very difficult place to invest. And the reason is because it goes through cycles. What you have is a boom in say, solar production, and then prices collapse. Wind turbines, what you see is, let's say resistance in a particular market to the build out of wind turbines. And guess what? Suddenly, you've got overcapacity in the market, prices go down.

Then you've got, let's say, the Ukrainian crisis hits. Guess what? Steel prices go up, copper prices go up, and anyone supplying offshore wind turbines is in trouble. Right? In the battery space, what you saw was last year, 2022-23, what you saw was battery prices increasing year-on-year. Well, guess what? This year, they're going down.

And you're also looking at global markets where there's different levels of acceleration, deacceleration and penetration. And that makes it very, very, very difficult. So I think being a hardware manufacturer in all these areas, very difficult.

Meg Wright:

And there are yet more difficulties for those tasked with expanding and transforming energy infrastructure.

Jacqui Bridge:

What we hear about and see is the challenges of delivering a large amount of infrastructure in what is a relatively very short period of time. You won't be surprised the challenges include the amount of skilled labour, the supply chains for the materials, the planning and environmental approvals that are needed.

Meg Wright:

Meet Jacqui Bridge, executive general manager for Energy Futures at Powerlink Queensland.

As the owner and operator of the electricity transmission network in the north-eastern Australian state, Powerlink Queensland shares many challenges with transmission operators around the world.

And while organizations across the sector are no stranger to many of these concerns, it’s the pace of change that is forcing energy companies to rethink their current and future plans, as Jacqui explains.

Jacqui Bridge:

We've got a few different challenges and future objectives. So, I think the first one is decarbonizing the economy in Australia, and specifically for us in Queensland. The second one is there is already a demand for exports of renewable energy. And the form that that renewable energy might be exported in could be quite wide-ranging. Hydrogen is getting a lot of commentary, but there's also lots of talk about embedding renewable energy in processed minerals or other products. So, we've basically got a domestic and an export challenge to meet. And I think, again, we’ll see that there are probably some competing priorities there.

At the same time, the load in Queensland, we've already got a certain level of load, then we've got many industries that are electrifying in order to decarbonize, and then we've got new loads as well, which could be feeding export renewables. And this is where the uncertainty comes in as to how quickly some of those new energy users will eventuate and also the location where they will be as well.

Meg Wright:

While the energy industry is facing a number of challenges on the road to decarbonizing, not all are cause for concern.

What then does this mean for the sector’s priorities in the year ahead, as organizations look to gain momentum and harness a growing sense of urgency?

Here’s Equinor’s Eirik Waerness again:

Eirik Waerness:

This whole energy transition challenge, if you like, is something that will require effort, investments, ideas, technology development from across a very large set of actors. It’s the ones that provide the infrastructure or supply services. It's the owners of the resource that we're talking about, whether it's the landowner, or the government, or the licence holder, as it were in the oil and gas, where we have to invest. It's the companies with the capital, it's the companies with the technology.

And fundamentally it will take place in a marketplace that is then affected by normal costs, by line of sight to a market price. And in the case of external effects that we're talking about here, of course we need massive help if you like, from framework conditions set by governments and policy makers.

Meg Wright:

Let’s take a closer look at how this outlook is shaping the industry in three key areas: Business strategy and investment, policy and regulation, and stakeholder partnerships.

Eirik Waerness:

For a lot of the low carbon and renewable technologies, this is about building an industry. It's about building a meaningful size relative to the overall energy market.

We need permits to do this, and then that's determined by governments around the world. How quickly can you do that? We need a market to sign, or an agreement with governments in terms of how do you price these services? What guarantee have you got on the electricity price to have a line of sight to profitability? Because we can't do these projects only solely based on volume ambitions. It has to be value in there.

Meg Wright:

For this reason too, data and technology are of growing importance to energy providers.

In fact, DNV’s Energy Industry Insights study shows that energy companies are currently prioritising investment in digitalization.

Here’s Powerlink Queensland’s Jacqui Bridge to explain.

Jacqui Bridge:

One of the things that we are doing in addition to the existing asset management practices is that we are working very closely with the Bureau of Meteorology, and looking at the types of weather information that we will need in the future. So looking at what data requirements there might be so that both for managing our assets, but also for operating the network where the generation fleet will be weather dependent.

And I think forecasting for weather and a range of other things is going to become a much more critical part of operating the power system as well as planning the power system.

Meg Wright:

But at a time where pressure to decarbonize is growing, and in a market where energy supply presents a real social and economic concern, how can energy companies go about making the best investment decisions?

Here’s Eirik Waerness again.

Eirik Waerness:

Once you've made a decision to make an investment, you're committed for a certain flow of capital expenditure to finish that project. That might take three, four, five years depending on what type of project it is. But our capital allocation then is of course determined by the opportunities that we have, the likelihood of this being profitable investments, our strategic priorities, which leads us to lean towards growing our alternative energy offering if you like, in our case, whether that is carbon capture and storage or renewable electricity.

We have rate of return requirements and breakeven requirements that allow us to choose differently between different projects. We do not expect the same, or we do not require the same rate of return for future renewable electricity investments as we do for oil and gas, and partly because the risk profile of any given investment is different.

And then of course, we're opportunity-constrained. For a long period, there's been too few projects to invest in renewables as an example, which is one of the reasons why some of these auctions became very competitive, as well, because there's a lot of capital available, but there's not enough projects. So you've had a competition with lower and lower subsidies, if you like.

Meg Wright:

From a policy and regulatory perspective too, energy providers must work together with governments to ensure that emissions targets are robust, demanding and achievable. As Gerard Reid explains.

Gerard Reid:

What governments have done is they've set targets. They've set carbon emission targets. They've set renewable targets on and on, which is all great, but what they do is they miss the big picture. So they go and say, "Okay, we're going to put in a renewable directive just to push renewables, but they don't think about the how. And the how is where the issues come about. But the problem about one how in renewables area, if I just say I'm going to push renewables and how we do it, we sort on that, but then you miss... Well, what about all those coal plants that are sitting on the power system today? What do we do with them? What do we do with heavy transport? What do we do with heat? I mean, these are huge questions.

And by the way then, if you want to talk about carbon emissions, then what do you do in the whole agriculture space? There's a whole pile of questions that come up. And what I see is these are all dealt with in silos, and that's not helpful. What we need to do is we need to think big picture and at a system level and a systemic level. That's how we do this. And if we don't do that, this transition is going to be very expensive and very, very bumpy.

Meg Wright:

While a systemic approach may sound like the most sensible way forward, it must account for the sheer number of stakeholders involved in managing a transition of this magnitude.

In Queensland, Australia, for example, the scale of the opportunity is matched by the complexity of these relationships.

Jacqui Bridge:

There's a very wide range of stakeholders when it comes to electricity and the power system. The expectations for engagement with stakeholders have absolutely risen even just in the last couple of years, but certainly over the last five to 10 years.

The scale of change is going to be impacting more people in Queensland and in other states in Australia as we need to build new infrastructure, both generation and network assets. So we've been working hard on identifying the stakeholders that we need to engage with and also on the process of engaging and explaining the why, the how, the when of what's going to happen to the power system and to the infrastructure in Queensland.

Eirik Waerness:

According to IEA, there's about 50 different types of technologies that have to come into place, be invented, then be scaled, and then be deployed at speed, if we are to have any chance of reaching a net-zero economy by 2045, or thereabouts globally.

Meg Wright:

There’s no doubt that advances in digital technology are necessary for energy providers to manage their networks differently—and better.

So, what then are the opportunities for the sector looking ahead?

Jacqui Bridge:

The number of generators that are connected into our system is growing very, very quickly. The figures are, we used to have 11 generators connected. We've now got more than 40, and we think that by the end of 2035 when a lot of our targets are, we'll have more than a hundred generated connections. So that gives you an idea that there's a lot more complexity and volume in what we need to manage as we operate the power system.

So looking at both the increased number of generators and the way that they will operate means that we will need to be able to make decisions that are much more complex and we will need to make them more quickly than we probably did in the past. So various different kinds of technology and operating systems will be needed to do that.

Meg Wright:

Digital advances will be key to delivering much-needed improvements in energy efficiency and storage.

This could change the very shape of the industry too, as Gerard and Jacqui both explain.

Gerard Reid:

Low cost power electronics, what they do is they enable us to control energy in ways that we were never able to before. You're not increasing the size of the battery. You're just improving the efficiencies in and around how that electricity moves.

Now that's very interesting, because if I take the case of a combustion engine, there's nothing really to change in a combustion engine in a hundred years. We've put a little bit of power electronics, you hybridise it a little bit and you improve it that way. But if you go pure electricity, you can also see that there are significant improvements possible in and around that. And that's an area that none of us are thinking about, but I think it's going to have significant impact.

Jacqui Bridge:

The role of the transmission network will change. We talk about it having been a one-way flow from generators to customers in the past, but with storage assets in the system, energy will actually be doing a loop effectively. So when there's excess energy, it'll travel to the storage, and it'll then have to travel back to the load. So the transmission network will be doing some quite different functions in the future.

Meg Wright:

Further afield too, opportunities abound in new and emerging markets, as the growing need for sustainable energy supply remains unmet.

As Eirik explains, this opportunity is perhaps one of the greatest paradoxes currently facing renewables providers.

Eirik Waerness:

So much of what we are seeing, in terms of renewable energy development, takes place in the parts of the world where we have enough energy already and where we're replacing existing sources of fossil fuels.

You don't see a lot of offshore wind, or onshore wind for that matter, in large parts of Africa, where they don't have electricity today. And how do we do that? How do we finance that? How do we overcome risk concerns, ownership issues, fairness issues? Who owns those types of assets?

Meg Wright:

As the outlook on regulation and investment continues to shift, consumers will be also looking for the biggest opportunities to capitalize on the transition.

Gerard Reid:

The customer is taking this energy transition in their own hands where it wasn't before. And I don't think that's going to change because we've built an energy system in Europe, which is high cost. Right? So the only answer to high cost is low cost. Because again, the economics of it makes sense, but secondly, from a regulatory point of view, they're also being pushed to do this as well. So there's also a regulatory push, which is pushing the consumer now to change their behaviour that wasn't there before, I'd say.

Meg Wright:

Despite a slowing in pace, it’s clear that the outlook among energy industry leaders remains optimistic for the future.

The challenge now, will be for the industry to rise to meet the transition with the scale and urgency that’s required.

Eirik Waerness:

There's a lot of talk about just energy transition. I haven't seen any one and a half degree scenario that reduces the difference in income per capita between the poorest countries in the world and the richest countries in the world. I don't think it's possible to stay within the one and a half degrees scenario and achieve that at the same time.

Jacqui Bridge:

I've recently been to the Energy Networks Association conference. And one of the keynote speakers there made an analogy between food storage and the advent of refrigeration allowing for that seasonal food production to be stored using refrigeration. And I think we're at that transition point. It's quite a good analogy for electricity, where we'll have an abundance at times, and that'll be seasonal as well as varying from day to day. And an ability to store that in large quantities is going to be necessary.

Gerard Reid:

I think we're at the beginning of an energy revolution. And the energy revolution is a technology revolution. Obviously, we've electrified a large part of our buildings over the last hundred years as it is, but if you look going forward, what we're going to do is we're going to electrify transport and we're going to electrify heat. And actually, we're going to do that in a clean way. We're going to use low cost renewables and other forms of clean energy combined with, I would say, real time power controls. And that's the revolution.

Meg Wright:

I’m Meg Wright, thanks for listening.

VO: This audio feature is part of DNV’s 14th annual Energy Industry Insights study. It is produced by FT Longitude in partnership with DNV.