“navigating Energy Contracts: What Consumers Need To Know In 2023” – Navigating the energy transition from disruption to growth positions energy and industrial companies for a low-carbon future.
Despite immediate financial pressures, our research suggests that energy and industrial companies will prioritize moving to cleaner energy sources in the long term.
“navigating Energy Contracts: What Consumers Need To Know In 2023”
The energy transition is the transition across the economy from hydrocarbon dependence to greater reliance on clean energy sources. Significant progress has already been made in the transition to a low-carbon energy future due to economic factors, social pressures and new technologies. This report examines the progress of the energy transition to date, the decisions management teams face in the energy and industrial sectors, and how the current economic downturn and potential low-energy-price environment will affect the transition’s future trajectory.
The Energy Transition Or Development
The COVID-19 shelter-in-place mandates have led to significant reductions in carbon emissions and pollution, providing a preview of the carbon reductions that have been under discussion since the Paris meetings in 2015. These changes have come at a huge cost: in February 2020 alone, China has reduced its carbon emissions by 25 percent.
And as of early April, traffic declines globally were estimated at nearly 40 percent (some hard-hit areas like New York state were down nearly 50 percent).
Progress in the energy transition can be measured through six channels. Company executives—and their shareholders and customers—are engineering change through these six channels:
Progress along these six channels may require companies to adopt new technologies, pioneer new partnerships, and anticipate changing cost structures. While short-term decision-making in the coming months is expected to focus on recovering from market disruption, Deloitte’s recent Energy Transition Survey results (see “About the Study”) suggest that the energy transition will be a priority for companies. In the long term (Figure 2).
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Deloitte began work on the Energy Transition Study in January 2020 to gain the perspectives of key decision makers among energy and industrial companies around 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. 21 percent of respondents identified themselves as C-suite executives (chairman, CEO, COO, CFO, among others); Another 31 percent self-identified as senior vice president or vice president, 16 percent identified themselves as senior-level managers such as directors, and the remaining 32 percent included 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 $100 million and $500 million, 60 percent reported revenues between $500 million and $10 billion, and the remaining 20 percent reported revenues above $10 billion. Executives represented a variety of industry sectors, broadly classified into oil and gas, chemicals and specialty materials, energy and utilities, and industrial products (including broad industrial products, aerospace, heavy equipment and diversified industries).
Much progress has been made in the first two channels: the decarbonization of energy sources and the improvement of energy efficiency in energy use and industrial processes. Advances along these two channels are expected to continue even in the current economic downturn due to the long-term benefits expected from achieving corporate decarbonization plans and energy efficiency gains already in place. However, we may see a temporary pause in other channels – especially identifying new areas of investment and deploying new technologies – due to immediate cost-cutting and market disruption.
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Our survey respondents reported that their companies already have a plan or are developing a strategy to reduce their dependence on fossil fuels: eighty-seven percent of chemical company executives, 92 percent of energy and utilities executives, and 92 percent of oil and gas. Industry executives responded affirmatively to these claims. Across sectors, the top drivers of decarbonization included consumer focus and energy efficiency and digital technologies supporting decarbonization. Notably, 56 percent of oil and gas respondents indicated that plan metrics are tied to executive compensation. When asked if 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 answered that it would have a positive impact.
Companies are likely to move forward along the decarbonization channel in three main areas: increasing low-carbon power generation, increasing electrification, and reducing fossil fuel demand.
Decarbonization already appears to be well underway in the U.S. energy sector, where 65 percent of customer accounts are served by utilities with publicly stated carbon or emissions reduction targets.
The surveyed energy and utility executives cited three main drivers for their decarbonization strategies: customer support, digital technologies for energy efficiency, and new business models and areas of investment. Progress in energy sector decarbonisation may also be due in part to relative economics. As shale gas production has increased in the United States, low-cost domestic natural gas has replaced coal in the generation mix in many states. Coal has fallen from meeting 45 percent of US energy demand in 2010 to 23 percent in 2019.
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As a result, in 2019, the U.S. achieved a significant reduction in overall carbon emissions—nearly 3 percent—due to the displacement of coal by cheaper domestic gas in the energy sector (Figure 3).
Similarly, the cost of renewable generation has fallen dramatically over the past 10 years, and in some regions renewables are cost-competitive with gas. Both equipment and overall project costs have fallen as the wind and solar industries have matured and scaled, with average solar photovoltaic (PV) module prices falling 77 percent and wind turbine costs 58 percent over the past 10 years.
Combining energy storage with renewables can help make many renewables more dispatchable and further improve their competitive position compared to conventional power plants. This has become more feasible recently, as the cost of lithium-ion battery packs has dropped 87 percent from 2010 to 2019.
Because of these price dynamics, renewable generation in the United States has grown by 77 percent over the past decade.
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In the European Union (EU), renewable energy currently accounts for 32 percent of energy generation, and their share is expected to grow further with the goal of becoming carbon neutral by 2050.
In the United States, renewables currently account for less than 17.5 percent of the generation mix (Figure 4) and are expected to rise to 38 percent by 2050.10
As the energy sector becomes less dependent on fossil fuels, increasing electrification of energy end-uses across the economy can accelerate decarbonization. 70 percent of power sector executives voted that their company is working to bring electricity to consumers, particularly electric vehicles (EVs). Other areas for electrification cited as priorities were industrial processes and buildings (air and space heating and cooling).
As the transport sector accounts for nearly 60 percent of global oil demand, electrification of transport, both light and heavy duty, could have an impact on oil demand.
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However, even in Europe and China, where policy supports the shift to EVs in the light vehicle sector, the percentage of new vehicle sales involving EVs is still small. In 2019, approximately 2.5 percent of all new vehicles purchased globally were electric, down from 1 percent in 2015.
However, the fall in global oil prices in March 2020 could slow EV adoption if lower gasoline and diesel prices delay the point of economic parity with internal combustion engine (ICE) vehicles.
Electrification of fleet vehicles is also underway in the industrial sector, with company targets for fleet electrification projected to increase from current targets of 20 percent of the fleet to nearly 40 percent by 2035.
Electrification of facilities and processes is happening faster. Deloitte’s 2019 100 percent renewables study showed that the majority of industrial manufacturers surveyed electrified their processes when feasible.
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The ongoing move to electrification in processes such as chemical treatment, cutting, metalworking and casting appears to be driven by advanced design, faster start-up times and higher performance. Although initial equipment and installation costs may be higher, lower operating costs and higher efficiency allow companies to reap a return on that investment. Similarly, the electrification of facilities can be a catalyst for the use of electricity to optimize industrial spaces, including factories, warehouses and offices, as well as integrated building management systems with electrical facility heating and cooling systems.
Decarbonization trends have a mixed impact on the oil and gas sector. Oil and gas companies are increasingly turning to renewable energy for their needs. Most have no renewables plan, and 49 percent of respondents plan to switch to clean fuels or renewables in their facilities and field operations, according to our survey results. This is especially true for large oil and gas companies, with 61 percent of respondents in this group stating that increasing reliance on clean fuels and renewables is at the core of their strategy. A similar trend has emerged in the chemical sector: Fifty-seven percent of chemical executives reported that their company has invested in using renewable materials to reduce emissions and waste. In addition, half of the chemicals executives surveyed reported that their company had increased its use of renewable energy for production, but this trend
