Many energy companies are struggling to position themselves in the new energy environment, where demand and supply relationships are changing rapidly. To survive and thrive in a decarbonising economy, they will need to participate in co-creating new markets and international partnerships at every step of the value chain.
Energy companies face twin challenges: they must decarbonise their own operations, and they must serve growing customer demand for energy overall and for low-carbon energy in particular. These challenges pose particular dilemmas for hard-to-abate sectors such as industry and transportation. And they are further complicated by changes in the macroeconomic context. Europe’s energy transition modelling and net zero ambitions have traditionally been based on the availability of cheap and abundant natural gas. But Russia’s invasion of Ukraine has throttled supply, so alternative sources of energy now have to be scaled up — fast. Affordability and availability have quickly become short-term challenges.
New energy systems must be international
Energy security has not been a major concern in Europe since the oil price shocks of the 1970s. And while oil and gas companies operating internationally typically pay attention to geopolitics, utility companies used to do this to a lesser extent because they tend to operate on a more national basis.
But the complex new value chains needed for the energy transition — offshore wind, energy storage, electricity interconnectors, carbon capture, storage and utilisation (CCUS) and hydrogen production — cannot be developed in isolation.
“We see this desire for energy security and a lot of us, including our governments, are translating that into energy independence,” says Jeroen van Hoof, global energy, utilities and resources leader at PwC. “But we also need to be really open minded and continue to partner on an international basis. Is that still happening to the level that is required to achieve a successful energy transition?”
“There are some rough estimates that if you took all of the offshore wind capacity currently available in the North Sea, add onshore to it, as well as what is planned to be built in the next few years—and used all this capacity to produce hydrogen to generate green electricity with electrolysers, we might be able to fuel 10 per cent to 15 per cent of all north-west Europe’s industrial needs,” he adds.
“This means that interdependencies between countries and geographies will continue to exist in any case. Some countries will be exporters, some will remain importers. And, interestingly, Europe will be a net energy importer, where for example the Middle East and Africa remain the larger exporters.”
What does cross-industry collaboration look like?
Partnerships across sectors are also going to be crucial. Energy ecosystems, will have to change as existing technologies are scaled up and new technologies, fuels and sources of generation enter the market. That means large industrial companies and energy companies are increasingly required to share technology, investments and risk in large infrastructure pilots.
Energy companies across the spectrum have had to rethink their business models. And electricity providers and retailers have created new value chains that go as far as households (the so-called prosumers) and industrial customers who can feed self-generated electricity back into the grid.
In the oil and gas sector, oil majors — many of which have published net zero emissions targets for 2050 — are directing investment to renewable energy, renewable liquid fuels, hydrogen and CCUS. The downstream sector in particular sees opportunities in integrating new feedstock materials and fuels such as sustainable aviation fuel.
But to make these new products viable from a business perspective, there have to be effective markets with sellers and customers. Energy companies and their customers have to develop new value chains that create and balance supply and demand. As end-customers benefit from less carbon-intensive energy for their own emissions count, it is in their interest to conclude off-take or risk-sharing agreements to create new markets in partnership with energy companies that supply low- or zero-carbon energy.
Partnerships are essential to the development and deployment of clean hydrogen, for example. “It’s hard to imagine a sector where partnerships are needed more,” says an executive at an oil major. “So many different technologies are needed to transform some of these sectors, and previously everything was developed in-house.”
How energy companies can act now
Investments in the energy sector are big, complex and long term. Capital may be available, but there are other factors that will be necessary for energy companies to make investment decisions.
First, projects need to have a business case that promises reasonable returns, and this usually requires a stable regulatory environment. The US Inflation Reduction Act has unlocked tax benefits for some projects, which for example make scaling up CCUS more viable in some locations. Meanwhile, the EU is still working on putting in place definitions and support mechanisms.
More broadly, energy companies need to enter into active dialogues with regulators to ensure that evolving policies and market designs continue to encourage capital to flow to the energy ecosystem and provide appropriate supporting mechanisms.
Next, projects need the right technology, talent and feedstock. Partnerships can help companies gain access to these and share the risk of new projects. And it is vital that players take an expansive view of partnerships. Partnerships will be required at all levels – technology, talent, capital, providing feedstock. Partnerships can help share risks and bring innovation to yield results more quickly while enabling the entire ecosystem to move forward in a more coordinated and collaborative manner.
As they forge a new future, companies will have to focus clearly on how to remain profitable in their current and future operations. For companies and countries to stay profitable while rolling out the systems and infrastructure they need to achieve net zero by 2050, they will have to develop and scale up these new value chains and partnerships with some urgency.
This article is based on a Financial Times roundtable discussion under Chatham House Rules held in collaboration with PwC.