“evolving Energy Regulations: Navigating Changes In The Gas Sector” – Navigating the energy transition from disruption to growth Energy and industrial companies are positioned for a lower carbon future

Despite immediate financial pressures, our research shows that energy and industrial companies will likely continue to prioritize the transition to cleaner energy sources in the long term.

“evolving Energy Regulations: Navigating Changes In The Gas Sector”

The energy transition is the transition from economy-wide reliance on hydrocarbons to greater reliance on cleaner energy sources. Significant progress has already been made in the transition to a low-carbon energy future due to economic factors, social pressure and new technologies. This report examines progress to date in the energy transition, the decisions facing management teams in the energy and industrial sectors, and how the current economic downturn and the likely environment of low energy prices could affect the future trajectory of the transition.

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The COVID-19 shelter mandates have led to significant reductions in carbon emissions and pollution, providing a preview of the carbon reductions discussed since the Paris meetings in 2015. These changes come at a huge cost, and in February 2020 alone, the China saw a 25 percent reduction in carbon emissions.

And the drop in traffic worldwide through early April was estimated at nearly 40 percent (down nearly 50 percent in some of the worst-hit areas, like New York state).

Progress in the energy transition can be measured in six channels. Company executives—and their shareholders and customers—change mechanically in these six channels:

Progress in these six channels could require companies to adopt new technologies, pioneer new partnerships and anticipate changing cost structures. While near-term decision-making in the coming months is expected to focus on recovery from market disruption, recent results from Deloitte’s Energy Transition Survey (see “About the Study”) suggest that the energy transition will likely continue to be a priority for companies in the long term (figure 2).

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Deloitte began work on the Energy Transitions study in January 2020 to gather the perspectives of key decision makers across energy and industrial companies on low-carbon trends and strategies.

As part of this study, Deloitte and Wakefield Research surveyed 600 C-suite executives and other senior corporate leaders from around the world in March 2020. Twenty-one percent of respondents identified themselves as C-suite executives (chairman, CEO, COO, CFO, among others). Another 31 percent identify themselves as a senior vice president or vice president, 16 percent identify themselves as senior executives such as managers, and the remaining 32 percent include environmental officers, health and safety officers, regulatory compliance officers, and business unit or department heads.

About 20 percent of the executives surveyed reported company revenues between US$100 million and US$500 million, 60 percent reported revenues between US$500 billion and US$10 billion, and the remaining 20 percent reported revenues in excess of US$10 billion. Executives represented diverse industry sectors, broadly classified as oil and gas, chemicals and specialty materials, electric power and utilities, and manufacturing (including broader manufacturing, aerospace, heavy equipment and diversified industries). .

Much progress has been made in the first two channels: decarbonisation of energy sources and energy efficiency improvements in energy use and industrial processes. Progress along these two channels is expected to continue even in the current economic downturn due to the corporate decarbonization plans already in place and the long-term benefits expected from achieving energy efficiency gains. However, we may see a temporary pause in the other channels—particularly in identifying new investment areas and developing new technologies—due to immediate spending cuts and market disruptions.

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Our survey respondents indicated that their companies either already had a plan or were developing a strategy to reduce dependence on fossil fuels: eighty-seven percent of chemical company executives, 92 percent of power and utilities executives, and 92 percent percent of oil and gas industry executives responded positively to these statements. Across sectors, top decarbonisation drivers included customer focus and digital technologies that support energy efficiency and decarbonisation. Specifically, 56 percent of oil and gas respondents reported that plan metrics are tied to executive compensation. And when asked whether a low-carbon future would have a positive, neutral, or negative impact on their organization’s future, more than 60 percent of oil and gas respondents said it would have a positive impact.

Companies are likely to continue to progress along the decarbonization channel in three key areas: increased use of low-carbon power generation, increased electrification, and reduced demand for fossil fuels.

Decarbonization already appears well underway in the US energy sector, where 65 percent of customer accounts are served by a utility with publicly stated carbon or emissions reduction goals.

Power and Utilities executives surveyed cited three key drivers for their decarbonization strategies: customer support, digital technologies for energy efficiency, and new business models and investment areas. Progress in decarbonizing the energy sector is also likely due in part to relative economics. As US shale gas production has increased, low-cost domestic natural gas has replaced coal in the generation mix in many states. Coal has fallen from 45% of US electricity demand in 2010 to 23% by 2019.

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As a result, in 2019, the United States achieved a significant reduction in total carbon emissions—nearly 3 percent—due to this carbon shift from cheaper domestic gas to the energy sector (figure 3).

Similarly, the cost of producing renewable energy has fallen dramatically over the past 10 years, making renewable energy competitive with natural gas in some areas. Both equipment and overall project costs have decreased as the wind and solar industries have matured and scaled, with the price of a typical solar photovoltaic (PV) module dropping by 77% and the cost of a wind turbine by 58% the last 10 years.

Combining energy storage with renewables helps many renewables become more dispatchable and further improves their competitive position against conventional power plants. This has become more feasible recently, as the cost of lithium-ion batteries has fallen by 87 percent from 2010 to 2019.

Due in part to these price dynamics, U.S. renewable energy production has increased by 77 percent over the past decade.

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In the European Union (EU), renewables currently account for 32 percent of electricity generation and their share is expected to increase further as they aim to become carbon neutral by 2050.

In the United States, renewables currently account for just under 17.5 percent of the generation mix (figure 4) and are expected to increase to 38 percent by 2050.10

As the energy sector becomes less dependent on fossil fuels, increased electrification of energy end-uses across the economy could accelerate decarbonisation. Seventy percent of power industry executives surveyed said their company is working to help customers electrify, particularly with electric vehicles (EVs). Other areas for electrification cited as priorities were industrial processes and buildings (air and space heating and cooling).

Electrification of transport, both light and heavy, could have an impact on oil demand, as the transport sector accounts for nearly 60 percent of global oil demand.

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However, the proportion of new vehicle sales involving electric vehicles is still small, even in Europe and China, where policy has supported the transition to electric vehicles in the light vehicle sector. In 2019, about 2.5 percent of all new vehicles purchased globally were electric, up from less than 1 percent in 2015.

However, the drop in global oil prices in March 2020 could slow EV adoption if lower gasoline and diesel prices delay the economic break-even point with internal combustion engine (ICE) vehicles.

The electrification of fleet vehicles in the industrial sector is also progressing and corporate targets for fleet electrification are set to increase from current targets of 20% of fleets to targets approaching 40% by 2035.

Electrification of facilities and processes is done faster. Deloitte’s 2019 100 Percent Renewable Energy Study found that the majority of industrial manufacturers surveyed have electrified their processes where possible.

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The continued movement toward electrification in processes such as chemical processing, cutting, metalworking, and casting appears to be driven by superior design, faster start-up times, and higher efficiency. Although initial equipment and installation costs may be higher, low operating costs and increased efficiency allow companies to achieve a return on this investment. Similarly, facility electrification combines electrical facility heating and cooling systems with intelligently connected building management systems and could be a catalyst for the use of electricity to optimize industrial spaces, including factories, warehouses and offices.

Decarbonisation trends have a mixed impact on the oil and gas sector. Increasingly, oil and gas companies are sourcing renewable energy for their needs. And while most don’t have a plan for renewables themselves, 49 percent of respondents plan to switch to cleaner fuels or renewable energy at their facilities and on-site businesses, according to our survey results. This is especially true for the largest oil and gas companies, as 61 percent of respondents from this group noted that increasing reliance on clean fuels and renewable energy sources was core to their strategy. A similar trend has emerged in the chemicals sector: fifty-seven percent of chemical executives reported that their company had invested in the use of renewable energy sources to reduce emissions and waste. Additionally, half of the chemical executives surveyed reported that their company had increased use of renewable energy sources for production, although this trend is

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