FT Longitude, London, UK
What happened in 2022 has challenged assumptions about the energy transition. Energy markets changed dramatically when the geopolitical crisis with Russia placed energy security front and center. As natural gas jumped to record prices, many gas-dependent companies and governments were forced to revisit their energy strategies.
In the second-half of 2022, Baker Hughes surveyed 555 senior executives in 21 countries who are active in energy and broader industry to find out what this means for the energy transition1 and ask: Can they balance energy security, sustainability and affordability to solve the energy trilemma?
From this research, three broad themes emerged:
Despite the energy trilemma, net-zero emissions by 2050 is still on the agenda. Despite geopolitical headwinds and heightened energy market volatility, respondents’ confidence in whether they will reach net zero by 2050 has not declined in most regions. High energy prices, a gloomy economic growth outlook and geopolitical developments affecting global energy markets highlight the complex and uncertain environment the industry will have to navigate as it transforms into a net-zero emissions economy.
In the short term, the events of the past year are making it more difficult for energy-intensive and hard-to-abate industries to proceed with their net-zero strategies. Since Russia’s invasion of Ukraine, energy prices have spiked because of the disruption to Russian exports. The tight gas supply caused much of the world to shift back toward burning coal for power generation, which is cheaper but more emissions intensive. Demand is rebounding to levels last seen in 2013. However, responses to the survey indicated that senior executives are generally confident that their organizations are on course for net zero. More respondents in 2022 say they are prepared to achieve net zero by 2050 than in the previous year’s poll (FIG. 1).
Respondents in Europe, Middle East and Africa (EMEA) and the Americas are most confident in their progress to net zero, which could be because both the U.S. and the European Union (EU) have embarked on significant climate legislation in the past 2 yr. The U.S. Inflation Reduction Act provides tax credits of at least $370 B for clean energy investments, and Europe responded to the energy crisis with its REPowerEU plan, which includes accelerating goals for the rollout of renewable energy and green hydrogen.
It is different in the Asia-Pacific region, where coal still accounts for most of the power generation. Respondents in the region show the biggest drop in confidence since last year: 36% said their organization was unprepared in 2021, and 50% say the same in 2022.
However, in line with the International Energy Agency’s (IEA’s) forecast that the upside for coal will be short-lived, optimism regarding cleaner energy does remain high: 47% of respondents say that their companies are not deprioritizing the energy transition because of the energy crisis (FIG. 2).
The current market might be a challenge for energy and industry, but energy and industry are not giving up on getting to net zero by 2050. Some progress is possible through emissions reductions with existing infrastructure and technology, but the consensus remains that long-term goalposts require more action.
Diversification is fundamental to the transition. Society can tackle the energy trilemma by diversifying the energy mix. Data shows that most respondents (57%) say they are making or planning to make new investments in natural gas/liquefied natural gas (LNG). “The energy transition is about economic prosperity, energy security—which is both reliability and affordability—and, of course, protecting the environment,” said Mark Nelson, Executive Vice President of Strategy, Policy and Development at Chevron. “Any time you over-index on any one of those, you may create an imbalance that can have unintended consequences.”
However, every region and country have different natural and financial resources available for energy generation and must therefore follow a bespoke roadmap to address the energy trilemma. This may result in regions pursuing net-zero goals in different ways and at a varying pace. Understanding the areas that must be addressed urgently can help understand the future trajectory of the transition.
In Asia-Pacific, for instance, where many countries are experiencing the effects of climate change and extreme weather, preparing for operational disruptions is the most important way to secure access to energy. In EMEA, respondents say that creating jobs and reskilling for an energy transition-ready workforce is the most important way to balance energy security and access to sustainable energy (FIG. 3). In the Americas, investing in lower-carbon energy is the top choice, possibly because of the region’s low share of renewables compared with its huge potential and the abundance of shale gas in the U.S.
In response to Europe’s energy crisis, 57% of the companies surveyed are making or planning to make new investments in natural gas/LNG.
Beyond Europe, the renewed demand for natural gas has also prompted investments globally. Analysts predict that U.S. LNG export capacity alone will increase by 84% to 21.7 Bft3/d by the end of 2027. In 2022, on the U.S. Gulf Coast, Cheniere took a final investment decision to expand liquefaction capacity at its Corpus Christi terminal and Venture Global’s LNG terminal in Plaquemines Parish, Louisiana. In Australia, Woodside Energy expanded gas processing capacity by building a second LNG train at the existing Pluto LNG site. “For the global supply and demand balance for both oil and LNG, and increasingly hydrogen, we do expect that the world is going to need all of those products in the time period where those assets will come online,” said Meg O’Neill, Chief Executive Officer of Woodside Energy. “So, we try to make sure we are not caught up in the dark days of 2020 or the heady days of 2022.”
Among the survey’s respondents, 30% said that they will prioritize investments in hydrogen more than synthetic fuels or gases; carbon capture, utilization and storage (CCUS); or nuclear power (FIG. 4). However, blue and green hydrogen need a more extensive infrastructure transition than other sources of clean energy, and new value chains that unlock cost competitiveness have not yet been proven.
Acceleration comes from technology, culture and finance. The pace of the energy transition will be determined by technology, culture change and finance. Businesses must invest in diversifying the energy mix and make plans for scaling up lower-carbon fuels and decarbonization technology.
Respondents said that the availability of energy transition technologies are the most important factor accelerating the transition to net zero (FIG. 5). However, there is a barrier to availability in the lack of regulatory frameworks, starting with a workable definition of clean hydrogen by regulators. “As the world thinks about these new types of energies, right now, the regulatory frameworks in a lot of these areas do not exist or are under development,” said O’Neill. “For example, the regulatory frameworks to do CCUS or use hydrogen are still evolving.”
Supply chain constraints and the cost of technology are two other barriers. “Technology is going to be absolutely imperative to start driving down the cost of some of the elements required to make this energy transition viable,” said O’Neill. “We must apply that same technology and manufacturing model to bring down the cost of things like electrolyzers and make sure that hydrogen opportunities are even more cost competitive.”
In a continued trend from 2021, survey respondents in 2022 said they are primarily looking into green or sustainable bonds to raise finance for the energy transition over the next 5 yr. Sustainable debt markets were resilient in the first nine months of 2022, with green bonds raising $312 B, down 13% year-on-year—slightly more subdued than in 2021 amid wider macroeconomic volatility.
More respondents in 2022 said they are interested in private equity capital for financing energy transition initiatives vs. 2021. However, to unlock private sector capital to accelerate the energy transition, policy certainty is needed, as well as a solid understanding of how to commercialize new technology and the role it can play in new and emerging low- and zero-carbon energy ecosystems—on both a national and international level.
Takeaways. The energy trilemma requires a foundation of new energy partnerships. As the world strives to achieve net-zero goals by 2050, companies are expediting near-term investments in lower-carbon energy such as natural gas and LNG, while also working to implement a new generation of solutions and systems with hydrogen, waste-to-energy, geothermal, battery storage and CCUS, albeit with a longer-term horizon.
The survey showed that, so far, respondents’ confidence in the transition has not wavered. Net-zero roadmaps will, however, face major challenges in 2023, including:
Partnerships and collaboration can unlock the energy systems of the future, supported by the adoption of new technology and aligned with a forward-looking hydrocarbons strategy, as we work together to solve the energy trilemma of energy security, sustainability and affordability. HP
LITERATURE CITED