Energy transition advanced rapidly through the collective public consciousness in the past two years although starting this past summer, it has run into significant challenges. To a large extent though, both energy transition’s progress in 2020 and the challenges of 2021 were more conceptual than rooted in concrete form.
Investor-led demand for a greater focus on environmental, social, and governance (ESG) issues in public companies’ strategies and plans accelerated through COVID-19 culminating in growing momentum for energy transition. While capital investments in low- and zero-carbon energy projects have grown quickly, they are still lower than the collective investments in the fossil fuel-based infrastructure.
For example, capital investment in low-carbon fuels, renewable power, and nuclear energy totaled ~$425 billion in 2020, while fossil fuel-based projects attracted ~$815 billion. This is significant because capital investment in fossil fuel-based energy was 10% to 25% lower in 2021 than in a business-as-usual 2019 while renewable power investments had grown over the same timeframe.
Given this background, what should we expect in 2022 for energy transition? The team at ADI Analytics got together to brainstorm and pull this outlook together.
- There is now a broad consensus around the need for Energy Transition i.e. to move our global energy mix towards low-/zero-carbon resources although companies, investors, and policymakers are debating on the best way to get there. Nothing illustrates the growing consensus around the need for Energy Transition more than ExxonMobil’s commitment to cut emissions at all of its operations to net zero by 2050. The announcement came in mid-January 2022 and a couple years after the company had suggested that it would focus on its core competencies rather than pursue low-/zero-carbon investments. ExxonMobil’s commitments are short of what BP and Shell have announced but reflect the broad consensus around energy transition that will only deepen in 2022 and beyond.
- Investors continue to lead the charge on energy transition supported to a large extent by the focus on environmental, social, and governance issues. While ExxonMobil’s recent commitment reflects the growing consensus around energy transition, it is the handiwork of activist investors who forced the company to add new board directors in the summer of 2021. Such investor pressure will only grow in 2022 and is capable of creating significant change and quickly so. Continuing with ExxonMobil for another example, the company’s low-carbon business unit has rapidly identified sites around the world where it can effectively deploy carbon capture and storage projects.
- Capital has started flowing in energy transition projects. Capital spending on energy transition projects and infrastructure amounted to ~$750 billion in 2021. Although most of this is dominated by renewable power, diversity and complexity of new energy transition projects, their scale and size, variety of technologies deployed, regional coverage, and range of business models are all growing. Public capital is also mobilizing itself rapidly. For example, the U.S. Department of Energy recently committed to guarantee a loan for up to $1.04 billion to Monolith’s new methane pyrolysis project to manufacture turquoise hydrogen. We see some risk to capital spending growth for energy transition in 2022 from rising interest rates globally due to inflation. Tighter financing will impact the competitiveness of several energy transition projects.
- Even so, current capital flows will be insufficient to finance the Energy Transition, which is going to be very expensive. In recent work, ADI has estimated that the energy transition, depending on its pace and level of policy support, will need capital investments that will total $30 to $45 trillion over the next 30 years. While the first world will have multiple routes to financing the energy transition, emerging economies will struggle and most likely require support from the largest of the developed economies.
- Energy transition should not be seen as a battle against oil & gas. ADI’s modeling has shown that even in the most aggressive and rapid energy transition scenarios, oil and gas will contribute to as much as 15% to 20% of the global energy mix in 2050. However, the last residual units of oil and gas that the world will consume post-2050 will, most likely, be the cleanest of all fossil fuel production. As a result, we anticipate oil & gas operators will in 2022 and beyond accelerate investments to eliminate fugitive emissions, cut flaring, develop circular operations, and invest in carbon capture and storage.
- On the flip side, oil & gas supply constraints cannot be blamed on the energy transition. As natural gas prices came to a boil in Asia and Europe through the fall of 2021, a blame game got underway in newspapers, magazines, and social media. The underlying theme was how the energy transition had led to the current energy crisis. Another version of this silly game was played during the winter storm Uri that left vast parts of Texas without power for several days in February 2021. The energy transition is going to take decades and cannot be reasonably held accountable for dramatic spikes in commodity prices that respond more to near-term events. Similarly, it was insufficient investments in winterizing natural gas infrastructure that was the prime factor behind the blackouts during Uri. Policymakers and the global energy industry should pursue a mature “all of the above approach” to energy supply, and we suspect limited progress will occur towards this goal in 2022.
- Energy transition innovation has truly taken off both in terms of the number of early-stage companies as well as the breadth of technologies being pursued. In client work that ADI has completed, we identified over 300 start-ups that are focused exclusively on low- and zero-carbon technologies across a number of energy industry segments. Collectively, over $150 billion of capital has flowed into energy transition innovation including rounds of financing completed by early-stage companies. Since a significant chunk of this capital was raised through special purpose acquisition companies (SPACs), which have now cooled off, start-ups will likely struggle to raise capital in 2022.
- Energy transition technologies will have to start demonstrating their promise in 2022. In the name of energy transition, and fueled by free flowing capital over the past few years, a number of energy transition technologies have been floated by early-stage companies. Investors will likely want to see demonstrations of these technologies at a faster pace and that process will screen several options and technologies out in 2022 and beyond.
- Investors are now turning their attention to the broader infrastructure and ecosystem needs for the energy transition. Investments in new battery technology, more efficient solar panels, and faster wind turbines are giving way to opportunities in battery recycling, installation of electric vehicles chargers, transforming port operations to use low-carbon fuels, and, carbon dioxide capture, storage, and utilization. While 2022 will see a surge of investments in these areas, returns will be lower and take longer akin to large infrastructure investments.
- Business model innovation is scaling up as fast as energy transition technologies. A number of oil & gas companies have now embraced the energy transition by creating business units that are focused on identifying opportunities that will directly contribute revenue and margin to the bottomline. In 2022, these efforts will continue to bring new energy and creativity to structuring business models that is necessary for a nascent, emerging market as the energy transition.
ADI Analytics will continue to track energy transition markets globally through research, consulting, and analytics. Please contact us to learn more and discuss how we can be of help.
