Energy transition stood out for growth and opportunity in an otherwise difficult energy industry landscape in 2020. Consumer and investor appetite both grew voraciously in 2020 for a broad range of low-carbon, sustainable, resource-efficient, and environmentally-friendly offerings and technologies. Policy support also grew although most of it was in Europe and, to a certain extent, in Asia and some states in the U.S. Technology continued to advance rapidly with many on-going efforts to leverage digital tools to further accelerate performance and cost competitiveness. Finally, a number of large energy incumbents announced plans to diversify into energy transition markets with varying levels of commitments and timelines.
1. Policy tailwinds will accelerate significantly in the U.S. in 2021.
President Joe Biden in his election campaign made a number of bold and ambitious energy transition commitments such as net-zero emissions by 2035. While it is unlikely that all will be realized or pursued, meaningful implementation of even a few will accelerate policy support for energy transition driving up both demand as well as capital investments in the sector. Specifically, we anticipate extension and expansion of existing tax credits and incentives for renewable power projects, electric vehicles and charging infrastructure, and potentially energy storage capacity. In the medium-term, the new administration's climate change commitments will require an expansive Clean Power Plan-like framework along with a number of smaller procedural changes that will all incentivize renewable power and other energy transition projects.
2. Global policy support for clean energy will continue to grow in Asia and Europe.
Globally, China is expected to announce new renewable power targets in its next five-year plan due shortly. Similar initiatives are being considered in India and other parts of Asia, while Europe, which in 2020 generated more power from renewables than coal or natural gas, continues with aggressive clean energy targets buoyed by improvements in costs and performance of new technologies. In other parts of the world, e.g., Middle East, Latin America, and Africa, we anticipate opportunistic and fragmented support that will come in fits and starts for energy transition policies.
3. Solar, wind, and electrification will be the workhorses of the energy transition.
Solar and wind capacity will continue to grow globally and accelerate as tax credits in the U.S. are extended and potentially expanded to cover energy storage capacity as well. Costs for these technologies continue to fall and although supply chain disruptions may occur due to global growth in renewable power capacity, they are likely to be limited in scope. More broadly, electrification of broad swaths of the economy and industrial sector will continue to expand as that continues to be the most effective decarbonization strategy.
4. The first few miles of the 'hydrogen highway' will come in 2021 but won't be easy.
The 'hydrogen highway' is a grand vision that continues to grow globally. Hydrogen supply costs from electrolyzers (the 'green' hydrogen pathway) are falling while improvements are being made to cut the greenhouse gas footprint of conventional technologies to produce 'blue' or 'grey' hydrogen. Simultaneously, pilot projects are growing to use green or blue hydrogen in a number of applications collectively building the technical know-how that will facilitate the fuel's adoption in more material ways going forward. A few large-scale projects will also be launched in 2021 similar to the green hydrogen and green ammonia plant in Saudi Arabia led by Air Products, ACWA Power, and NEOM.
5. Decarbonization will require a number of smaller sectors to adopt clean fuels such as hydrogen, and some of that may begin in 2021.
A more material adoption of hydrogen to realizing the broader vision will, however, depend on end-users' ability to switch to the fuel. Hydrogen can be used in a wide range of industrial applications including manufacturing steel, glass, and semiconductors. The technical specifications, volumes, and price points for each of these applications vary widely and a deeper understanding of these segments will be critical to achieving widespread commercial application and deployment of hydrogen and the concomitant goals of decarbonization.
6. Low-carbon oil & gas opportunities abound and will find new and growing interest.
Although hydrogen, energy storage, and electric vehicles dominate the conversation, there are a number of opportunities in low-carbon oil & gas markets such as biofuels, natural gas, small-scale LNG, and related areas. Displacement of carbon-intensive fuels such as coal for power generation or diesel in back-up power demand applications with small-scale LNG can be a highly effective strategy with attractive returns in many parts of the world as some of ADI Analytics' work has shown recently. Renewable diesel projects have already enjoyed a lot of growth in recent years. As new regulations and capital find its way to support decarbonization, opportunities in biofuels and natural gas may find new and growing interest.
7. Energy storage capacity will continue to grow and demand may accelerate with new policies.
Energy storage continues to improve its cost competitiveness with new digital technologies further cutting costs and improving reliability and longevity. Even so, adoption is limited to approximately a third of all utility-scale solar projects, and far less for residential solar capacity. This can accelerate if battery storage projects also qualify for tax credits along with regulatory changes that enable batter capacity owners to generate new revenue streams through ancillary grid services.
8. New capital flows and growing investor appetite will drive deals and consolidation.
Over $500 billion were invested in 2020 in the broader energy transition markets including renewable power, electric vehicles, and other low-carbon energy technologies. In addition, investor pressures on ESG issues are rising rapidly across all segments of the energy value chain. Further, most energy transition markets are highly fragmented with a number of players and fully capitalizing on the growing opportunity will require best-in-class players to achieve scale for both growth as well as cost efficiencies.
As a result, we anticipate significant transactions and M&A activity in 2021 especially around more mature energy transition markets such as solar power equipment and services, energy storage, electric vehicle infrastructure, and hydrogen and biofuel technologies.
9. The energy sector's corporate landscape will face significant changes.
The oil and gas majors are all embarking on varying levels of shifts in their portfolios and strategies. BP, Shell, and Total lead the pack with dramatic commitments to move away from an oil & gas supply business towards an integrated energy player model. These shifts will not be easy as we have detailed elsewhere but are achievable and can be rewarded with shareholder attention and returns with small, meaningful advances as a few companies like Neste and Orsted have demonstrated. Even so, there are a number of risks and the shift won't be easy as energy transition projects offer lower returns in comparison to what oil & gas majors have typically earned on their investments. Further, as a number of majors shift to energy transition markets, competition for the best opportunities will intensify. Finally, the thesis around oil & gas majors' core competencies being relevant to energy transition businesses has to be tested. A number of these risks will likely gain more clarity in 2021.
10. The plasticity of 'energy transition' is an overarching risk for the industry.
'Sustainability' was famously described in the early years of the environmental movement as a plastic word subject to a wide range of interpretations to mean and suit varying goals and outcomes. 'Energy transition' today is rapidly headed towards a similar plasticity as it is being used to label a wide range of technologies and offerings. Renewable power, distributed generation, and microgrids through vehicles powered by batteries, natural gas and LNG, and hydrogen to low-carbon fuels, materials, and energy distribution are all being described as energy transition.
A reckoning is in the works as more rigorous definitions based on lifecycle analyses of greenhouse gas footprints will be necessary. That reckoning is unlikely in 2021 but as supply of 'energy transition' offerings grows, consumers, investors, regulators, and other stakeholders will start seeking greater clarity to justify and differentiate the valuation premiums claimed by 'energy transition' companies.
Building on the excellent momentum of 2020, energy transition markets will only grow faster in 2021. Given the heady mix of regulatory and policy support, growing capital investments, and innovation, energy transition markets offer a number of exciting opportunities and risks. Our team at ADI Analytics has increasingly supported a wide range of clients in these markets with our consulting and research projects. Please reach out us to learn more about how we can help.
Uday Turaga
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