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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.

In brief
  • Stakeholders increasingly expect energy companies to lower their carbon footprint as climate change intensifies.
  • How energy companies respond in the transition toward a low-carbon world will mainly determine their long-term value.
  • Investing in alternative energy sources and embracing digitalization is key to effective portfolio optimization for greater 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.

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Greening the energy mix 

Beyond the pandemic, there are other factors altering the dynamics of the energy arena. As solar panels, windmills, batteries and electric vehicles (EVs) get cheaper and better, there will likely be an increased uptake of these clean energy solutions. Consequently, traditional energy sources such as coal, oil and gas will likely be retired as energy generators and power providers increase the share of renewables and carbon-free energy in their portfolios.

 

Additionally, green hydrogen has emerged as a carbon-free fuel that can be used in transportation and as a source of heat in homes, businesses and industrial processes. It can also be utilized as dispatchable power to back up intermittent renewables. If advanced biofuels and synthetic fuels become cost-effective, they could provide a carbon-free alternative to gasoline, diesel and aviation fuels using existing infrastructure.  

 

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.

Energy companies can seize opportunities during the energy transition by utilizing
available resources and understanding the key trends and trajectory of the wider
market.

The EY Fueling the Future framework looked at the future of energy through three different lenses — consumer, technology and regulatory — and developed four scenarios after analyzing five variables (EVs, energy efficiency, attractiveness of renewable electricity, future of nuclear and coal, and concentration of economic growth) and their impact on returns. Named Slow Peak, The Long Goodbye, Critical Gas and Meet Me in Paris, the scenarios range from a very gradual movement from hydrocarbons to rapid adoption of renewables.

Slow Peak: oil stronger for longer

Continued upstream cost reductions reduce the competition between hydrocarbons and renewables. Transportation demand in developing countries surges and defaults to the incumbent internal combustion energy technology, while consumer perceptions about EV performance slow EV adoption. Growing economies in developing countries drive demand for petrochemicals, energy-intense industrial usage and aviation. On the power and utilities front, a butterfly effect is expected in thriving economies with an increase in demand expected for energy and the associated infrastructure as the markets go through the “slower” peak. Peak oil demand will eventually happen, but not soon.

The Long Goodbye: a renewable (r)evolution

EVs, distributed generation, renewable generation and battery storage (along with other alternatives) gain market share as a result of falling costs. Traditional energy companies are likely to gradually migrate their capital from core businesses to alternative and emerging energy technologies with digital enablement and sustainable energy solutions.

Critical Gas: it’s gas and oil now

Power demand surges as EV charging takes off and developing economies electrify. Renewable, distributed generation and battery technologies progress as expected, but capital markets and operational matters tilt toward a continued role for gas. Oil and gas capital moves toward gas-focused upstream and LNG assets. 

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Meet Me in Paris: the future is now 

Alternative energy becomes cheap quickly enough to displace existing infrastructure. Climate change becomes a top priority for governments across the world. Consumers lead the way with environmental awareness driving dramatic lifestyle changes.

 

Energy companies will continue to face pressure from consumers, investors and governments to decarbonize as the climate emergency goes on. Beyond clean energy solutions, the success of the global low-carbon transition will depend on government action and consumers’ responses. To enhance long-term value, energy companies will need to optimize their portfolios by investing in alternative energy sources and embracing digitalization.

Summary

Energy companies are under pressure from consumers, investors and governments to reduce their carbon footprint as climate change intensifies. The future of energy might unfold into different scenarios ranging from a very gradual movement from hydrocarbons to rapid adoption of renewables. By investing in alternative energy sources and embracing digitalization, energy companies can optimize their portfolios to enhance long-term value.

About this article

Photographic portrait of Sanjeev Gupta
Sanjeev Gupta
EY Asia-Pacific Oil & Gas Leader
Thought leader working with stakeholders in the energy sector. Passionate about client’s journey toward improved capital efficiency, transformation and digitalization.
Related topics
Energy and resources
Power and utilities
Sustainability
Sustainable Impact Hub

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