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Energy Reimagined - Influencing outcomes of the future of energy mix

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What's the recipe for tomorrow's energy mix? We explored three scenarios around the present and future of the energy landscape as introduced at EY’s Energy Reimagined Summit.

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Energy Reimagined - Influencing outcomes of the future of energy mix

  1. 1. Energy Reimagined Influencing outcomes: the future of energy mix February 2018
  2. 2. Page 2 Section 1: recap of EY Energy Reimagined Summit The energy landscape of the future is unknown and likely to be very different from the current energy mix, so what do energy companies need to do to be ready for the future.
  3. 3. Page 3 EY Energy Reimagined Summit was our first forum to debate the path of energy and help bring fresh insights and leading practices. We brought together industry leaders in an energizing and dynamic environment to explore innovation, collaboration and growth for the future of energy. How will the shifting energy mix change your business model? Will technology represent a force for effective change or for displacement? 1 2 3 4 What will be the role of public and private players in energizing nations? How can the energy industry collaborate beyond traditional boundaries?
  4. 4. Page 4 EY introduced three scenarios that served as the basis of debate for the Energy Reimagined Summit
  5. 5. Page 5 We also introduced the “countdown clock” concept that highlights the improving economics of non-utility solar plus battery technology 1 3 Source: Utility impact model central scenario EUROPE - EY analysis Fully delivered cost of electricity Cost of transmission and distribution Non utility solar + battery LCOE Grid cost parity of non-utility solar plus storage systems T&D parity with non-utility solar + battery LCOE EV & ICE parity (cost + performance) Illustrators* Tipping point 3 is 24 years away in Europe Tipping point 1 is 5 years away in Europe Tipping point 2 is 8 years away in Europe * Analysis is based on average profiles. In each geography, there will be segments of the customer base for whom the economics improve much sooner. Birth of the new energy system Electricity and mobility industry convergence The digital energy market place 0 100 200 300 400 500 600 700 2015 2020 2025 2030 2035 2040 2045 2050 US$/MWh 2 For illustration only
  6. 6. Page 6 Section 2: Exploring the three scenarios Where are we today and what is likely to happen – present and future of the energy landscape
  7. 7. Page 7 The energy landscape has evolved over the last few years, with the rapid rise of renewables 4,418.2 3,732.0 3,204.1 910.3 592.1 127.1 217.1 75.4 Oil Coal Natural Gas Hydro Electric Nuclear Energy Geothermal, Biomass and Other Wind Solar Consumption (2016) and consumption growth (2006-2016) by energy source (Mtoe) 1.04% 2.2%1.3% (0.7)%2.9% 50%21.9%7.5%2006-2016 CAGR 0.7% 0.9%(0.2)% (0.14)%1.6% 17.8%8.2%3.5%2011-2016 CAGR 2016 consumption Mtoe Oil, gas and coal collective account for ~85% of the energy consumed in 2016 Energy consumption growth witnessed significant drop in 2011-2016 Solar energy consumption increased 57 times during 2006- 2016; installed capacity increased by 52 times Will wind and solar outpace hydrocarbons in consumption volume growth? If yes, what timelines can be associated with dominance of solar and wind over hydrocarbons?
  8. 8. Page 8 Global energy demand is set to grow by ~30% over the next 25 years and will further influence the energy mix going forward Notes (*): Energy demand range (2040) reflects projections from IEA, EIA and Exxon. Energy demand under central scenarios is considered from sources where more than one scenario was available. 0 100 200 300 Power Buildings Industry Transport Primary energy demand projections (2015 – 2040)* Energy demand (Quadrillion BTU) Energy demand (2015) Energy demand range (2040) Drivers of energy demand Source: IEA’s WEO 2016 New Policies Scenario Rising population Economic growth Urbanization Electrification Energy efficiency Mean energy demand (2040) Power sector’s share of total growth in primary energy; driven by electrification in developing countries and structural shift away from industry and towards services sector Transport: easing growth due to improving fuel economy, however, potential for mobility revolution heralded by electric vehicles Industry: growth weighed down by efficiency gains and shift away from energy intensive sectors; varying projections around the extent of structural economic shift in China Buildings: slow growth due to improved efficiency measures ~50%
  9. 9. Page 9 EIA (2040) Divergent views exist on the continued dominance of hydrocarbons going forward Conventional energy sources (coal, gas and oil) Cleanenergysources(renewablesandnuclear) Energy mix forecasts spectrum BP – Base Scenario (2035) 50% 100% 0% 50% 40% 30% 20% 10% 60% 70% 80% 90% BP – Faster Transition (2035) BP – Even Faster Transition (2035) Exxon (2040) Statoil – Reform (2050) Statoil – Renewal (2050) Statoil – Rivalry (2050) IEA – Current Policies (2040) IEA – New Policies (2040) IEA – 450 Scenario (2040) Key Oil Gas Coal Nuclear Hydro Non-hydro renewables Wood Mackenzie (2035) Actual (2015) Note: Biomass/Bioenergy/Biofuels are considered part of non-hydro renewablesSource: IEA, Exxon, BP, EIA, Wood Mackenzie and Statoil All projections agree on the direction towards which global energy mix is transitioning – with share of clean energy sources expected to increase at the expense of conventional energy sources – however, there is little consensus on: ► What will the energy mix look like in the next 20 years? ► How quickly will we get to a more balanced energy mix? ► How disruptive will a renewable transformation be? ► How can energy companies prepare themselves?Scenario I: Hydrocarbon heavy Scenario II: Electric Evolution Scenario III: Renewable revolution
  10. 10. Page 10 The vast range of projections fall into three distinct, broad scenarios, one of which will define the future energy ecosystem Source: EY Analysis based on the following sources: International Energy Agency EA-World Energy Outlook 2016, Exxon-Outlook for Energy 2017, BP Energy Outlook 2017, US Energy Information Administration-Annual Energy Outlook 2017, Wood Mackenzie-Global Energy Forecast to 2030 and Statoil- Energy Perspectives 2017 Energy mix forecasts scenario spectrum Share of energy supply Non-fossil fuels Fossil fuels 70% 10% 20% 56% 15% 29% 78% 6% 16% Fossil fuel ~5x of renewables Fossils Nuclear Renewables Fossil fuel ~2x of renewables Fossil fuel ~3.5x of renewables Fossils Nuclear Renewables Fossils Nuclear Renewables
  11. 11. Page 11 Scenario 1 Hydrocarbon heavy: the energy world of tomorrow doesn’t look a whole lot different from the world of today Hydrocarbon heavy Sustainability preferences ► Consumers don’t push for sustainable energy; instead prefer cheapest source Overall ► 2oC climate change target unlikely to be met ► Political and economic uncertainty stalls investment and impact energy availability ► Increased hydrocarbon consumption amidst political tensions affects energy affordability Utilities ► Constantly evolving incentives for renewables hinder ability to make efficient investment choices Oil & Gas ► Strong and continued upstream capex, especially unconventional assets ► Oil and gas prices expected to be volatile driven by demand and more unconventional supply Government Consumers Technology Renewable costs competitiveness ► Rate of renewable cost reduction slows down EV uptake ► EVs penetrate small to mid-size segment globally ► 56m EVs worldwide by 2030 Energy efficiency ► $15tr investments in efficiency improvements ► Efficiency reduces liquid fuel demand by 17 Mb/d Decarbonization policies ► Climate change ambitions practically ignored ► Limited phase out of fossil fuel subsidies Carbon trading ► EU ETS lingers on but is ineffective ► Other existing regional trading systems stall Regulations around unconventional gas ► More governments outside North America permit unconventional oil and gas
  12. 12. Page 12 Scenario 2 Electric evolution: advances in technology and consumer attitudes enable a faster progression toward low-carbon energy Electric evolution Sustainability preferences ► Negative attitude towards fossil fuels ► Acceptance of conservation investments and transportation alternatives Overall ► Sustainability progress despite missing climate targets ► Enhanced efficiency and lower dependency on fossil fuels improves energy security ► Regulators struggle to establish the right market structures that are increasingly supplied by renewables ► Approaching peak oil Utilities ► Conventional generation assets become uneconomical and struggle to provide returns on committed investments ► More energy choices lead to greater consumer intervention ► Maintaining power grids becomes challenging due to high renewable generation Oil & Gas ► Influence on policy making and diversified portfolios (through capex allocations to renewables) become critical for survival ► Increased risk of stranded or devalued fossil fuel assets ► Intense shareholder activism against hydrocarbons ► Increased regulatory pressure to reduce energy intensity Government Consumers Technology Renewable costs competitiveness ► Wind energy costs fall 8%-24%; solar 46%-66% ► ~60% renewable generation does not require subsidy EV uptake ► Lower battery costs spur transport electrification ► 160m EVs worldwide by 2030 Energy efficiency ► $23tr investments in efficiency improvements ► 20%-30% energy efficiency savings by 2040 Decarbonization policies ► Governments honor Paris agreement ► Oil importers end fossil fuel subsidies in 10 years Carbon trading ► Governments introduce new carbon pricing instruments Regulations around unconventional gas ► New restrictions on fracking and other unconventional drilling techniques
  13. 13. Page 13 Scenario 3 Renewable revolution: all variables move in the same direction to enable a very balanced energy mix, with almost a 50:50 split between fossil fuels and renewables Renewable revolution Sustainability preferences ► Consumers demand green power from suppliers and prefer eco-friendly transportation Overall ► On track to meet the 2oC climate change target ► Peak oil realized ► Decentralized power networks become costly to operate which may impact both energy affordability and security of supply Utilities ► Shift towards self-generation and peer-to-peer power trading erodes traditional utility asset base ► New competition from customer-centric organizations like Amazon, Google Oil & Gas ► Significant amount of stranded assets due to low hydrocarbon demand ► Stringent regulations to limit release and flaring of harmful gases force change in strategy; steep learning curve for O&G companies ► Substantial capex devoted to renewable energy Government Consumers Technology Renewable costs competitiveness ► Wind energy costs fall 10%-26%; solar 48%-70% ► High CO2 prices raise LCOEs of conventional energy EV uptake ► Stringent fuel-economy and emissions regulations ► 200m EVs worldwide by 2030 Energy efficiency ► $35tr investments in efficiency improvements ► ~40% more efficient electric motor-driven systems Decarbonization policies ► New stringent climate change policies ► Fossil fuel subsidy ends globally except Middle East ► $100b/yr decarbonisation aid for emerging markets Carbon trading ► All industrialized countries adopt carbon trading ► Carbon markets mature with interlinked prices Regulations around unconventional gas ► Fracking banned internationally
  14. 14. Page 14 Energy companies should watch for signposts in the next five years as indicators of which of the three scenarios is becoming dominant Energy mix forecasts scenario spectrum ► Carbon prices remain low around $20/t - $30/t ► Oil prices remain volatile ► Other governments follow the US in abandoning Paris agreement ► New centers of demand for hydrocarbons emerge ► Carbon prices rise to $30/t – $40/t by 2020 ► S&P Global Clean Energy Index outperforms S&P Global 1200 Energy index ► Impairments of fossil-fuel based generation assets rise ► Breakthrough in EV and battery technology ► Battery pack prices fall below $100/KWh ► Carbon prices incentivize development of CCS ► Governments ban some least-efficient energy appliances ► Feed-in-tariffs for renewables fall rapidly ► Growing instances of timelines being set by countries for bans on internal combustion vehicles
  15. 15. Page 15 Section 3: Considerations for the future energy landscape
  16. 16. Page 16 Energy companies will determine the energy mix of the future by making strategic decisions that address questions around policy enforcement, technological advancements and consumer preferences ► Will renewable technologies maintain their steep learning curve? ► Will battery efficiency improve enough to make EVs competitive? ► When will we be able to install solar panels in a ubiquitous way? ► Will new technologies be able to make fracking clean and safe? ► Will other governments follow the US and pull out of the Paris agreement? ► For how long will the governments provide subsidies for renewables? ► Will governments make timely and sufficient grid investments to support renewables? ► How will O&G exporters react to the clear energy evolution? ► Will consumers accept a premium tariff for clean energy? ► Will consumers make low carbon investments even if the ROI is not clear? ► Will drivers get used to taking half an hour instead of five minutes to “fill” their car? ► Will consumers start rejecting products as they become environmentally aware? Technology Government Consumer
  17. 17. Page 17 Energy companies should assess their readiness for each of the future scenarios by asking the right questions to help drive their preferred outcome ► Decrease carbon footprint while growing ► Invest in technologies to enable cleaner power from fossil-fuels ► Modify hydrocarbon portfolio in favor of gas/LNG ► Identify suitable opportunities in renewables ► Modify portfolio to accommodate renewable energy ► Develop and/or acquire new capabilities ► Revamp portfolio by exiting hydrocarbon business ► Implement organizational change ► Explore new retail models to supply electricity in a decentralized world ► Develop and/or acquire new capabilities Hydrocarbon Heavy Electric Evolution Renewable Revolution How ready are you for the new energy future? Business Process and Technology ► Adapt existing processes or revamp company? ► Are you properly organized for new business models? People and Culture ► Are you recruiting talent with the right mindset? ► Are you properly incentivized? Branding and Reputation ► How to create sustainable competitive advantage? Capital Allocation ► Where are the best returns likely to be on the energy value chain? Assess operations and business model Understand the changes required Define long-term targets Develop long-term plans Ask the right questions
  18. 18. What you can expect when working with EY EY is known for its deep energy sector knowledge, relationships with the industry’s key stakeholders and strong global capabilities. Clients see us as the most globally connected organization among the Big Four. Whether you are already active in multiple geographies or are planning to expand your business to other countries, we can assemble a multinational team that combines deep industry knowledge, experience resolving the issues you are facing and savvy local advice. ► We work with you as you transform your business, helping you anticipate the pitfalls and lock in the results on which your future depends. ► Our global sector is committed to providing industry insight that creates value for you. It connects our oil and gas professionals worldwide and serves as a hub for sharing industry- focused knowledge to help you succeed in a changing world. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY’s Global Oil & Gas Sector can help your business The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. About EY’s Global Power & Utilities Sector In a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly. EY’s Global Power & Utilities Sector brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Sector team works to anticipate market trends, identify their implications and develop points of view on relevant sector issues. Ultimately, this team enables us to help you meet your goals and compete more effectively. © 2018 EYGM Limited. All Rights Reserved. EYG no. 00388-184GBL BMC Agency GA 1005168 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/energyreimagined #EYEnergy

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