The energy transition is a step-change in the nature of how humanity functions. It is a break from a distinct mode of operating that began during the mid-to-late 1700s during the Industrial Revolution. For any step-change to be successful often divergent interests need to be unified. This is specifically true for the energy space that we currently find ourselves in: there needs to be a ‘synergisation’ of the interests of fossil fuel extraction and processing companies, renewable energy providers and the customers and consumers of energy products.
This ‘synergisation’ is happening through the innovation of mass-electrification; the mainstreaming of electric and low-carbon mobility and transformation; fuel switching for high-energy industrial processes; and wide-spectrum digital transformation to drive efficiency. For success, it also needs to be coupled with an enabling regulatory environment and the requisite financial backing. Up until now there have been few common threads available to pull together to unite the purposes of these critical actors. There are a number of emergent themes which are providing impetus to this. Some of the major ones are briefly described below:
1. The global response to the COVID-19 pandemic has demonstrated that the unwritten and written rules of the economic game are able to be altered significantly in the face of a commonly identified threat. This has emboldened lobby groups (such as WindEurope and others) to show renewed vigour in lobbying governments to use renewables-linked stimulus to revive economies after the COVID-19 lockdowns and resultant economic crises facing the various regions of the world. Governments themselves in the context of the EU are also holding this line and the European Commission has just announced a massive EUR750 billion stimulus package with alignment to these themes. This all points to the fact that the regulatory environment is evolving to allow for the energy transition to accelerate and drive value creation for the businesses and employees involved in these value chains.
2. The price parity of renewables with other forms of electricity generation is now a fundamental reality in all estimations of new-build LCOE. Coupled with the advance of utility-scale battery storage systems, this allows for scalable options related to seasonal storage and other supply-shaping innovations to receive real attention. This drives value for both the producers and the consumers of energy and allows for new energy sources to compete on an economic basis.
3. There is significant interest in the hydrogen economy from all quarters. Most recently, the emergent focus is on harnessing abundant renewable energy to produce “green hydrogen” in order to power the next generation of industry. The shift to a renewables and hydrogen-based economy is able to capitalise on existing gas infrastructure in much of North America, Europe and Asia. Large gas players such as Uniper and Siemens are readying brownfield assets for conversion to hydrogen fuel and adapting their transmission and storage infrastructure accordingly. There has already been a demonstration of intent by oil companies. A recent survey by standards authority DNV-GL of 1000 senior oil gas professionals recorded a more than 100% increase in the number of respondents who thought their organisations would invest in or develop hydrogen projects in the next year (20% in 2019 and 42% in 2020). The mining, industrial and transportation sectors will also appreciate the possibilities afforded by hydrogen. This is a major development that brings into line some of the competing and divergent interests that have slowed or diverted the energy transition process historically.
4. ESG-linked funding has increasingly become a feature of the financing landscape over the last 3 years, with specialised ESG-linked loans (where loan interest rates are set according to the achievement of specific ESG goals) being one of the fastest growing segments of this market. This funding incentivises corporates to put ESG at the centre of their operations in order to reduce their overall cost of capital. Usually, the energy transition forms part of these strategies and targets. This shows that funding providers understand that they form a critical part of the nexus which leads companies to act responsibly and that they are able to offer suitable products to the market that stimulate this behaviour.
These are exciting developments which remind us that we are at the precipice of an energy transition that will exceed the scale of the previous one almost 300 years ago.