By Francois Austin.
This article first appeared on World Economic Forum Agenda on November 5, 2018.
The energy industry was vastly different 20 years ago, when two colleagues and I founded a consultancy which advised global oil and gas companies. Our work was primarily focused on reducing operational risks and addressing operational cost challenges. Since then, concerns have evolved.
Most significantly, climate change and the push for renewables used to be inconsequential. They weren’t the concern of oil and gas companies the way they are today. However, acting fast is imperative, as the recent report by the UN Intergovernmental Panel on Climate Change (IPCC) shows. We have 12 years to keep global warming to a maximum of 1.5°C, beyond which even half a degree will significantly increase the risk of natural disasters.
Today, there’s a heightened awareness among oil and gas companies of where they sit in society. They’re trying to address issues around climate change through the transition to renewables and by reducing carbon emissions. They’re not only concerned with what’s happening inside their operations, but also the path to renewables via gas.
Today’s energy security is implied in the flexibility of a diversified grid which is hard to measure and even harder to ensure. Everything must change - energy infrastructure, sourcing and distribution.
The realization that we are in an interconnected and global matrix of energy production and consumption is necessary, albeit complicated. In a solely fossil-fuelled world, security was ensured by the reliability of energy supply. Today’s energy security is implied in the flexibility of a diversified grid which is hard to measure and even harder to ensure. Everything must change - energy infrastructure, sourcing and distribution.
The annual Energy Trilemma Index measures 125 economies on their ability to balance energy priorities according to security, equity and sustainability. It reveals how economies are progressing, and gives policy-makers and industry leaders the tools and information to collaborate and effect change. It enables policy-makers to manage the energy transition, and companies to increase their competitive advantage.
There are three principal topics that should be considered to ensure economies and societies harness new technology and opportunities, while keeping the Energy Trilemma in balance. Large industry players should continue to address the transition from fossil fuels through investment and development in renewables; policy-makers need to work with utilities companies to address the infrastructure requirements of diversified sources of energy; and, since technology is driving better performance and reducing the cost of renewables, incumbent companies will have to evolve quickly, whether they’re national utilities companies or global energy providers, to avoid being replaced by new, digitally savvy competitors.
Technology is helping to improve the performance and reduce the cost of renewables. Furthermore, climate change considerations, other environmental issues and litigatory concerns are increasingly shaping investment fund decisions, with $6 trillion of funds (led by the insurance sector with $3 trillion) committed to divestment from fossil fuel equity classes. Major energy companies have cited this divestment as a material risk to their business and are doing significant development in renewables. Meanwhile, investment in clean energy has grown at 14% CAGR over the last 10 years.
Coal-fired generation in OECD countries is in terminal decline. At the current rate, by 2050 up to 90% of OECD energy generation will be from renewables. And as the cost of renewables declines, the economics of new fossil fuel or nuclear investments become unviable, given there’s no fuel cost for renewable generation.
While many developing economies will have to rely on coal in the near term, we can see that in future this may shift. For example, China’s use of coal has dropped to 56% from 80% in 2007. This could be indicative of future trends in other economies still reliant on coal as they focus on balancing the Energy Trilemma of security, affordability and sustainability.
Shifts in electricity generation and transport fuels will help meet sustainability goals. The energy transition will change the economics of the oil and gas industry, and potentially those of entire cities and companies. Almost 400 global companies, cities, states and regions recently set 100% renewable energy targets and/or zero emissions targets, including California - the world’s fifth-largest economy - and businesses with collective annual revenues of $2.75 trillion. Energy companies and regulators must adapt their strategies and innovate to respond to these goals.
Sometimes, the energy transition can seem unwieldy. But by measuring energy systems for economies around the world through the Energy Trilemma Index in terms of security, equity and environmental sustainability, we can not only help grow economies, but also transform societies.
The complex issues facing the globalized energy industry are impossible for countries and companies to tackle in isolation. Therefore, navigating through evolving policy and regulatory frameworks across countries and regions, while being innovative in how we generate power, can not only achieve progress but also maintain balance.