How energy companies can seize opportunities for a low-carbon future

Under increasing pressure to lower their carbon footprint, energy companies must optimize their portfolios to enhance long-term value.

As evidence of climate change continues to mount, global efforts to decarbonize have taken on a new urgency. Against this backdrop, energy companies not only have to deal with relentless pressure from consumers and investors to curb emissions, but also navigate new government regulations and taxes aimed at reducing their carbon footprint.

The long-term value of these businesses will be largely determined by how they respond to the changing landscape. Every decision they make — from capital allocation and organizational change to technology investment — will be influenced by what they see on the horizon. 

Portfolio choices will be critical in driving energy companies’ returns. The EY Fueling the Future scenarios illustrate how changes in the forces that drive energy transition, such as technology improvement, government policies and consumer preferences, translate to the return on investment for the spectrum of asset classes.

How the pandemic could change the game 

The pace of economic recovery from the COVID-19 pandemic is still uncertain. While vaccination programs are in full swing in most of the developing world, an emerging feature of this pandemic is the mutation of the virus and the spread of variants that could reduce the effectiveness of vaccines. More infections and potentially long-lived disruptions can’t be ruled out. The uneven rates of recovery between Asia, India and the rest of the world will have an impact on energy markets.

The pandemic has led to interruptions in trends relating to energy intensity, some of which may be permanent. For instance, travel is likely to be restricted for some time and partial remote learning and working are still in place. As a result of these changes, there is potential for primary energy demand for an end use such as aviation to get disconnected from economic growth temporarily or permanently. Energy intensity will then be redirected to other areas associated with day-to-day consumption as time spent indoors rises.

For these clean energy solutions to be effective, governments will need to play a key role in the decarbonization process. Unfortunately, the commitment to reduce carbon emissions is uneven and can differ vastly from country to country. We expect carbon pricing to become the common denominator to measure how strongly governments incentivize decarbonization.

Consumer response to technology improvement and government policies is another wild card in the journey toward a low-carbon world. It will be some time before people get comfortable with new technologies such as EVs. Similarly, it will take time for utilities to integrate renewables into their systems and consumers to get used to being responsible for generating their own power. Addressing these issues will require capital investment.

Capitalizing on opportunities 

Governments and organizations around the world have agreed to ambitious targets to cut and eventually end their dependency on carbon energy. A shift to renewables makes good business sense as their cost continues to fall. Global operational renewable energy capacity is projected to increase from 2.4TW today to 6.4TW in 2030.

To seize opportunities for a low-carbon future, energy companies should seek to optimize their portfolios by incorporating alternative energy investments. Alternative energy brings diverse opportunities, each with a variety of risk-return profiles and required competencies. Matching these opportunities to a company’s investor base, skill sets and corporate culture should be carefully considered.

Businesses also need to make innovation work with customer-focused digital enablement. Big energy companies are organized to provide massive quantities of commodity energy to customers with established buying habits. However, new energy will come to the market in new ways from different directions. Navigating the evolving landscape, digesting the inevitable failures and learning the lessons is a practice that will have to be developed. As margins fall, electricity networks will be under new stress levels, while energy companies will be forced to invest more to keep up with changes. The industry needs to embrace innovation to deliver cost-efficient and sustainable solutions.

Underpinning these developments is digitalization of the industry and its processes. This will require energy companies to find, organize, analyze and act on data more quickly and effectively than their competitors. Companies that can harness their own data and marry it with external data sources will be rewarded at each stage of the investment journey derived from the capitalization of assets and opportunities. The benefits are multifold, as seen in the digital transformation program undertaken by Tenaga Nasional Berhad, Malaysia’s energy provider.

The energy transition will be one of the most significant, important reallocations of capital in recent times. Despite uncertainty over the future of this transition, taking necessary steps to utilize available resources and understanding the key trends and trajectory of the wider market can enable energy companies to capture opportunities during the transition.