The Energy Transition Requires Economic Transition
Panel: Putting a dent in the fossil fuel supply by deploying renewable energy sources requires stronger supply chains, whole systems thinking.
Jennifer
Pallanich
Hart Energy
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Even with a record number of wind and solar installations in 2022, fossil fuels still supplied 82% of global energy, raising the question of why the share of oil, gas and coal remains so high.
The Energy Institute (EI) Statistical Review of World Energy, released June 26, examined how the world’s energy systems responded to the supply and price crises of 2022 alongside the ongoing climate change crisis. The 2023 Statistical Review of World Energy — the 72nd edition of the report — was the first conducted under EI’s auspices. Previously, BP produced the annual study. EI carried out the review with partners KPMG and Kearney, supported by BP. Heriot-Watt University compiled the data.
The report delivered a mix of encouraging and concerning statistics. During a June 26 webcast, panelists applauded the increase in renewable energy deployments but expressed alarm about continued rising emissions levels as various governments relaxed pandemic-related restrictions. Increasing the percentage of renewable energy in the global mix calls for whole systems thinking, stronger supply chains and shifts in business mindsets, panelists said.
In 2022, global energy demand grew by 1% compared to 2021, and emissions rose by 0.8%.
Richard Forrest, global sustainability lead partner and chair of the Energy Transition Institute at Kearney, said emissions levels are “clearly” going in the wrong direction.
“The big, open question is, is the energy transition still going in the right direction?” he said. “The energy transition is not a straight path. It will be messy. It will continue to be messy.”
He said it will require spending a lot of money and building up supply chains.
“The systems elements of these are all interconnected. We put renewables in, we need storage,” he said.
The supply chains for wind, solar and grid infrastructure, such as basic transformers, were all squeezed at different points last year, Forrest said.
“That will continue to be the case,” he said.
He called the U.S. Inflation Reduction Act, which earmarked billions of dollars for renewables, a clear signal of intent. It’s also had global ramifications.
“This is an energy transition, but it's also an economic transition. And that economic transition is something that many regions will clearly want to participate in. We had a response from the EU. We've had China already significantly engaged in solar and electric vehicles and other elements of this,” Forrest said. “So you've got major economies now putting real money and real pace behind the build out of those technologies, those supply chains at scale. I'm very excited to see what that means for ’23.”
The stickiness of fossil fuels
Simon Virley, vice chair and head of energy and natural resources at KPMG in the U.K., noted that renewable installations have accelerated and are “commercially viable without subsidy in pretty much every part of the world.”
Nevertheless, fossil fuels remain 82% of the world’s energy supply.
“We are still stuck, despite that growth, at 82%. And if you look back at that data series, going back 10 years, 20 years, 30 years, we've only come down a few percentage points,” he said.
Juliet Davenport, EI president, said existing infrastructure is a factor in making oil, gas and carbon dominant and persistent in the energy mix.
“We are still stuck despite that growth at 82%. And if you look back at that data series, going back 10 years, 20 years, 30 years, we've only come down a few percentage points.”—Simon Virley, vice chair and head of energy and natural resources at KPMG in the U.K.
“The infrastructure, particularly the power infrastructure, was built in a high carbon world,” she said. “Suddenly you are taking a power infrastructure that was built for a completely different world and asking it to take in completely different feeds from power.”
And as regulations evolve, fossil fuel assets may stop looking so positive, she said.
Juliet Davenport, EI president (Source: Energy Institute webcast)
“If you've got power stations or fossil assets that have a life cycle beyond the energy transition, how are we actually looking at that from an audit point of view?” Davenport said. “That is a massive challenge. There's no nice curve. If assets begin to not have a value going forward, then they have to be written off.”
For oil and gas companies to go “all in” on renewable energy, a change in mindset is required since the long-term business models are different, she said.
“You're going from oil and gas exploration to renewables, which are a very different margin,” she said.
Virley said the corporate reporting side of the energy transition will play an important role going forward.
“The way that companies account for this stuff is going to become increasingly important,” he said.
A new use
On the other hand, Forrest said, companies might find new uses for those assets.
“There is a lot of energy and activity going around about how do existing energy system infrastructure assets play a role going forward” and what their reuse case might be, he said.
EI Chief Executive Nick Wayth said if the energy industry is going to deliver on the transition, it needs to better understand the business and individual consumers—and help them better understand how consumption patterns need to change to support the transition.
“If we start mapping the world backwards from ‘what am I actually trying to achieve in terms of moving something, lighting something, heating something,’ and work back from there, what do I actually need to make that happen?” he asked. “That's a fundamental shift that we need to have in the mindset around this.”
