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
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