Global energy flows: a new landscape

The transition from our current energy system, dominated by fossil-fuels, into one based on renewable energy has enormous implications. Currently, the sophisticated and powerful trade networks that connect production with consumption are geared towards oil and gas, but the development of renewable electrons and molecules is forging new trade routes. Amidst all of these changes, the possible decentralisation of the current global energy market stands to further increase market complexity and volatility.

Major shifts, aided by strong policy support

From Europe to the US to South Korea, massive economic stimulus packages that are intended to spur a comeback from the pandemic are also paving the way for more resilient economies and sustainable energy systems. These forces of policy, together with investment and technological change, have galvanised a shift not seen in the energy sector since the Industrial Revolution.

This has cleared an opening for new energy systems to emerge in the coming decade. Industries such as oil and gas, power and utilities, and chemicals, once sharply delineated, will converge to form integrated energy systems. According to the International Energy Agency, by 2040, renewables, chiefly wind and solar energy, will account for about 47% of the electricity market, up from 29% today.

The International Renewable Energy Agency predicts that infrastructure to reach this target across the globe will cost $13 trillion USD through 2050. We estimate that the cost of transforming the electricity networks in Europe alone will be at least $2 trillion USD over the next 30 years.

Molecules and electrons on new paths

The transition from our current energy system, which is dominated by fossil-fuel molecules, into one based on renewable-powered electrons and carbon-free molecules, has enormous implications. This transformation can best be understood by looking at the paths that energy molecules and electrons take from the point of creation to the point of consumption or use.

Today, global energy usage still relies heavily on fossil-fuel sources and is traditionally segmented into clearly delineated sectors. Despite all the investments made in renewables to date, 80% of total energy still comes from oil, coal and natural gas. These sources also provide refined products across industry, transport and buildings. This leads to the simple, linear flow of electrons and molecules through their respective value chains. Today, fossil fuels create most of the energy that powers industry, heats buildings, propels factories and fuel most forms of transportation.

90% renewable, 10% fossil energy in 2050

As renewable energy eclipses fossil fuels’ market share, the origins of electrons and molecules, and the paths they take, start to re-organise. Renewable energy sources will be the cornerstone for the economy, while fossil fuels will remain commonplace for sectors that are hard to decarbonise. Some portion of these fossil fuels will go to refineries to create fuel, transport, or carbon specifically for non-energy use in the chemical or food industry. However, biomass and waste will surpass fossil fuels as creators of heat and power through renewable natural gas. Similarly, the capturing and recycling of CO₂ will also create new carbon molecule pathways.

Electrons produced by renewable energy will be the dominant force in this evolved system. They will provide the lion’s share of electricity, fill up massive batteries that will become electricity generators in their own right, power factories, heat and cool buildings, and, as transportation continues to go electric, emerge as a major fuel source for vehicles.

The final switch to a highly renewable energy system will require a quantum leap in storage for electrons and molecules; a rethinking of the role of baseload non-emitting technologies, such as nuclear, geothermal and hydro; and increased flexibility on the part of end users in the ways they manage energy consumption and use.

Greener, more complex energy systems

The greater presence of intermittent sources of power, such as wind and solar, will create challenges in aligning peak demand with production to reliably provide energy in times of stress. It also will spur efforts to store electricity, manage its use effectively and create new sources of power supplies.

We also anticipate a new landscape for global energy output. Currently, the sophisticated and powerful trade networks that connect production with consumption primarily favour oil and gas thanks to available pipelines, shipping routes, and infrastructure for oil and gas tankers. The development of renewable electrons and molecules is set to forge new trade routes, which will require substantial new investment.

As these flows of energy change, participants may struggle to manage the new energy system equilibrium and the high risks and volatility it will bring. At the same time, a world that relies less on oil and coal is likely to present a new set of geopolitical dynamics surrounding energy. There will be an increasing political push for self-sufficiency and strategic autonomy world-wide; regions or countries that rely on imports will be keen to reduce dependency. The possible decentralisation of the current global energy market will further increase complexity and volatility.

Strategic implications: convergence

The new paths carved by molecules and electrons will lead to greater convergence and an erosion of the traditional barriers between energy sectors. As a result, companies will need to become more integrated –combining electrons and molecules, and acting across broader parts of the value chain. Companies that do not become integrated players will need to seek attractive niches based on differentiated capabilities.

Utilities, beyond assuming a renewed prominence as holders of the electrons, will have to delve into new business activities, such as data services and analytics, the financing and installation of household solar/charging solutions, and B2B behind-the-meter energy management. Chemical companies must reinvent themselves as champions of the circular economy, focusing on harvesting, creating, capturing and recycling molecules in a closed loop. Integrated oil companies are on their way to transform their business as well, often implemented through acquisitions in the respective sectors.

The road ahead

Addressing energy transformation challenges will require strong state orchestration, at least in the early stages of market development and strategic infrastructure. But neither the government nor the private sector can manage the transition to net zero and the new energy landscape alone. The transition is simply too complex and too uncertain, and getting the outcome right is too important. What’s needed is a collective response – the state and the market working together in new ways.

Those tasked with developing government policy and regulation should move quickly to gain clarity on the prospective roles of the state and market and put appropriate structures into place. Investors have to reassess the risk profiles of existing investments with a new perspective on how the paths forged by electrons and molecules will impact them. They have to start developing alternate investments for an increasingly decarbonised global future – even in areas and market sectors where policies are not yet firmly in place.