Bumpy road to energy transition in 2023 
Scaling up clean energy infrastructure while scaling down hydrocarbon production was always going to be a tricky balancing act. Energy transitions take decades and this one will need to happen faster if we are to keep the 1.5°C pathway alive, writes Adrian del Maestro, Director of Research and Thought Leadership in Energy at Strategy&, PWC.

External factors such as geopolitical events add complexity. The Ukraine conflict has elevated the importance of energy security, as countries in Europe import more LNG and bring coal-powered generation (often controversially) online to ‘keep the lights on’.

So, will we see the forces of decarbonisation accelerate or decelerate in 2023? And what are the likely bumps in the road?

Oil and gas markets will remain volatile. On the gas side, while Europe is coping, market fundamentals will remain tight in the near-term as supply is constrained. An extreme cold weather event (as occurred in north-east Asia in 2021) could see LNG cargo for Europe diverted elsewhere. Unexpected downtimes at major LNG export terminals (such as what occurred with Freeport in the US) can put more pressure on taut supply chains. Therefore, expect gas prices to remain high and volatile.

The oil markets will be buffeted by a number of headwinds. The threat of global recession and severe COVID lockdowns in China, which are beginning to ease, have weighed down on oil demand and prices. Geopolitics will complicate the outlook.

However, it is unclear how the European Union (EU) embargo on Russian seaborne oil and the G7 oil price cap will affect markets. Should Russia decide to reduce output in retaliation, expect upward pressures on the oil price. The next EU embargo on Russian petroleum products kicks in from 5 February 2023, which will likely strain already tight diesel markets. Indeed, we expect more price volatility in crude and products.

Clean energy and renewables investment will accelerate due to concerns around energy security. The International Energy Agency (IEA) forecasts a rapid global expansion of renewable power capacity in the next five years to reach 2,400 GW – the same achieved in the past 20 years!

Nevertheless, challenges remain. Renewables developers have to deal with lengthy planning processes. Wind turbine manufacturers are also likely to face ongoing financial distress caused by volatile commodity prices and strained supply chains.

International oil companies (IOCs) with a diversification strategy and strong cash flow from hydrocarbon operations will likely channel more investment into low-carbon plays. We anticipate ongoing investment in renewable power generation capacity and other low-carbon sources – biofuel is a case in point.

Notably, there is a mixed outlook for hydrogen and the electrification of road transport. Some of the hype in hydrogen is dissipating as we see adoption in some limited but still nascent areas. For example, use of hydrogen in heavy transport, such as trains in Germany, is making headway. The decarbonisation of industrial clusters will remain a focal point with the potential for hydrogen substitution in feedstocks for industrial processes and fuel for heavy transport.

As for electric vehicles (EVs), while the cost of living crisis may slow EV adoption for consumers, expect fleets to maintain momentum and decarbonise vehicles, although the economics of the total cost of ownership may become more challenging.

So, the direction of travel is clear, but there will be bumps in the road. To keep the 1.5°C pathway alive we shall need to reduce global greenhouse gas (GHG) emissions by 45% by 2030. Not a lot of time is left. But this will focus minds and efforts. 

‘Clean energy and renewables investment will accelerate due to concerns around energy security.’ – Adrian del Maestro, Director of Research and Thought Leadership in Energy, Strategy&, PWC

The energy transition is a catch-up game 
It’s time for industry and politicians to catch up with the global clean economy race, writes Lisa Fischer of independent energy and environmental sector think tank E3G.  
  
Russia’s invasion of Ukraine brought forward a big showdown over the phase-out of Russian fossil fuels in Europe. This had been on the cards ever since the EU agreed to go for climate neutrality in 2019. It would have become part of a much slower transformation of the European economy. Yet, when Putin tried to force Europe’s hand, he misjudged the maturity of the clean energy economy.

The shift to LNG imports and temporary switch-on of coal is still happening and taking economic and political toll – but this will be temporary. The EU’s eyes are set on the energy transition through its Green Deal.

Heat pump and solar power markets are transforming energy distribution networks. The IEA estimates there will be 1.8bn heat pumps in buildings in 2050, providing 55% of energy demand for heating globally. While the EU solar market is expected to triple between 2022 and 2026 from about 200 GW in 2022 to maybe 600 GW in 2026, according to its latest EU solar power outlook.

Energy-intensive industries have found energy savings potentials in manufacturing, often without reducing output. All this will accelerate the European trajectory away from fossil fuels. 

What’s more, the EU is not alone. The new Inflation Reduction Act in the US has focused minds on the growth potential in clean energy markets. Brazil is considering cancelling a suite of gas power plants and pipelines planned by former President Jair Bolsinaro, instead lining up offshore wind projects of over 170 GW. 

The recent UN Climate Change Conference, COP27, did what COPs need to do – moving forward just enough to maintain trust in global cooperation to stabilise the climate. In 2022, it did so by establishing a support mechanism for vulnerable countries with losses from climate impacts, a major political stumbling block. On the margins, countries also agreed a deal to support selected nations in their transition away from coal. However, COP27 did not deliver other new mitigation announcements. This will be the focus in 2023, and it looks like major economies will be ready to build on the acceleration triggered by Russia’s invasion. 

We believe that 2022 forced fossil fuel importers to focus on reducing their exposure quickly and permanently – creating new growth markets and bringing forward dates for peaking fossil fuel demand. 

According to IEA Executive Director Fatih Birol, as he presented the 2022 World Energy Outlook, the IEA is projecting ‘a distinct peak of fossil fuels’ whose share in the global energy mix is expected to fall from around 80% to about 70% in the 2030s under current policies. ‘It will be the first time since the industrial revolution we are going to see a peak of fossil fuels,’ he said.

In 2023, countries like the UK which are both importers and exporters of fossil fuels are at a crossroads: whether to follow the siren song from the old, fossil economy by investing in upstream expansion and inefficient use of hydrogen or go ‘full steam ahead’ into the global clean economy race.  

‘In 2023, countries like the UK which are both importers and exporters of fossil fuels are at the crossroads… whether to invest in upstream expansion [of fossil fuels] and inefficient use of hydrogen or go full steam ahead into the global clean economy race.’ – Lisa Fischer, E3G

Placing bets in the energy transition race 
Who are likely to be the key contenders in the energy transition race, and which will be the winners, losers or also-rans? First let’s look at energy prices, writes James Forrest, Global Energy and Utilities Lead at Capgemini.

In 2023, market interventions by governments will move upstream. They will continue to support customers with the costs of their energy through price caps and subsidies, but they will also make direct interventions into energy markets and into energy sources. Examples will include setting caps on commodity prices and entering government sponsored and funded bilateral supply agreements.

Then there’s the vital issue of energy reduction. All players in the energy system will seek to reduce the amount of energy they use through demand reduction and energy efficiency schemes. We expect to see this in areas such as home insulation, industrial process operators further optimising energy use, and businesses being more frugal in terms of heating, lighting and refrigeration, etc.

System operators will offer more energy flexibility schemes where customers are rewarded for changing their usage patterns to avoid peak periods. New market players will emerge to offer demand response services, creating a significant market over the next two years. 

Governments and regulators will continue to look at fundamental energy market redesign. The current market designs will be put under increasing pressure during 2023 as the shift to very low marginal cost renewable supply puts strains on fossil fuel-based market structures.

Governments and regulators will continue to look at fundamental energy market redesign, according to James Forrest of Capgemini
Photo: Adobe Stock

European oil and gas companies will move faster into the energy transition and will rebalance shareholder returns with energy transition investments. US oil and gas companies are also likely to speed up as renewables become more competitive than fossil fuels.

The US Inflation Reduction Act and the EU’s Fit for 55 programmes will accelerate sovereign investment in energy transition programmes. This will further boost cleaner energy sources – wind and solar. The nuclear renaissance will also continue, with gas electricity generation investments holding up as an alternative to coal. 

This activity will put increased strain on global supply chains and sourcing of materials, equipment and minerals will become a key discussion in 2023. Skill shortages in the workforce for energy transition will become more evident, and programmes to address this will be boosted. 

Consumers will become more activated on security of supply concerns and will push for greater sovereign control of energy sources.

In 2023, the hype for hydrogen and carbon capture and storage (CCS) will reach a crunch point. We believe there will be increased reality in the conversation about their applicability, cost and timeframes. This will enable a more focused conversation about the business case for hydrogen and CCS.

In conclusion, we see a significant opportunity in 2023 for those willing to embrace change and to accelerate their plans. The winners in the energy transition race will be the players who during 2023 took ideas and made them into reality. The winners will hyper-scale their capabilities and bring their customers with them on the journey. 

‘The winners in the energy transition race will be the players who during 2023 took ideas and made them into reality.’ – James Forrest, Global Energy and Utilities Lead at Capgemini