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Sector analysis The future of
energy transition Energy transition is a path focusing on transforming the energy mix to reduce emissions, by ensuring we strengthen the global response to climate change and meet the Paris agreement. The use of renewables is a key part of this process, and although the challenge of decarbonising certain sectors such as industry could be difficult as it requires high-grade heat, the use of hydrogen for example provides a route for this transition. However, there are other elements that need to be considered as well. Examples include improving energy efficiency using technologies such as Carbon, Capture, Utilisation and Storage (CCUS) during hydrogen production from natural gas, hydrogen production from renewable energy and implementing biofuels for targets such as the International Maritime Organisation (IMO) 2050 goal which aims to reduce shipping emissions by the year 2050 to 50% of their 2008 level.
The current lower price of oil due to the impact the coronavirus pandemic has had on demand, where major economic activity has been suspended, has led to mixed opinions on the effect on energy transition. On one hand it is believed that low energy prices reduce the economic incentive to conserve and utilise it more efficiently. It is also believed that energy companies could find it harder to fund their renewable energy investments if the current situation starts leading to more spending cuts. On the other hand, the current oil price volatility can’t be ignored. The recent oil price war was due to disagreements between Russia and Saudi Arabia around production cuts in the OPEC+ deal. The oil price vulnerability in a scenario like this could justify a structural shift away from fossil fuels, and investors would prefer the long-term price stability which renewables offer.
Tayo Id
owu
Budget reduction by companies cannot be underestimated during this global crisis, and we have observed announcements such as Shell’s US$5bn cut in spending. Therefore, it is likely that there will be some short to midterm impact on the energy transition. However, companies will also see the need to diversify assets and ensure future adaptability. The factors that led companies into beginning the energy transition such as the rise of new technologies like electric vehicles, government goals to tackle emissions and the oil price volatility which affects project finance in some cases will be here even after things go back to normal following the pandemic. The head of the International Energy Agency said in an interview in March 2020 that stimulus packages to prop up economic recovery marked an opportunity for governments to shape policies in line with climate action, and invest in clean energy technologies that accelerate the energy transition. He mentioned that a well-designed package could offer economic benefits as part of this transition. BP has said it will be cutting spending in 2020 by 25%, however it still plans to introduce US$2.5bn of cost savings by the end of 2021 through the digitalisation and integration of its businesses. The role digital technology will play in the energy transition is worth mentioning, as it allows a decarbonised system run in a stable and efficient manner. On the utility side, it allows system monitoring and tracking key process parameters. Royal Dutch Shell has also announced plans to collaborate with Udacity to digitally train its workers in artificial intelligence, and this training method of choice is expected to continue growing for companies who need employees up to speed and to benefit from its remote advantage. Whatever the case is regarding the pace of the energy transition, companies will be striving for new ways of working which offers them long term flexibility and ensuring carbon emissions targets are met. Tayo Idowu, Energy Analyst, Midstream & Downstream tayo.idowu@the-eic.com
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