Preparing for the energy transition
The industrial energy transition is characterised by fast-moving changes, technological developments, and a high degree of uncertainty.
KBC (A Yokogawa Company)
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The global sustainability agenda is challenging every sector, and the energy and chemicals industry is no exception. Local and global energy systems are now faced with a profound transformation to move from predominantly centralised, hydrocarbon-sourced energy generation to decentralised, lower CO2 emissions energy generation, transportation, storage, and use.
There are many theories about how the transition process will play out and they cover the full spectrum of possibilities. Some argue that the energy sector can continue to do business as usual, while at the other end of the extreme some claim that we cannot dismiss the possibility that a sudden and extensive shift will lead to the world fully meeting the Intergovernmental Panel on Climate Change’s (IPCC) emission targets. While these are not completely unfounded, we believe that there are two leading scenarios that businesses cannot ignore.
Depending on the driving force, whether that will be primarily regulation or economic stimuli, the industry is either ahead of a slow change that will only be achieved in the long term or it will face a more turbulent period leading to dramatic changes within the next 5-10 years.
Based on KBC’s insight and industry expertise, we have formulated two scenarios to highlight the risks to the status quo and current
consensus, as well as outline the differences in action that must be taken should alternative scenarios come to fruition. KBC names these scenarios: 1. Evolution not Revolution; and 2. Plausible Disruption.
Evolution not Revolution
Despite the rhetoric, in this scenario the industry will only see a significant CO2 reduction in the longer term, with Europe achieving net-zero emissions by 2050 and other regions following later. Primarily driven by regulation, the global investment associated with the transition, though still large, will be minimised by exploiting existing energy infrastructure to the maximum extent possible. Regulatory differences between regions mean that implementation of emissions reduction solutions will be patchy and have a lower total impact in the short run.
This scenario is based on The Fuels Europe Vision 2050 paper which has been developed with a view to achieving net-zero emissions in the region by 2050 while managing the financial costs, business disruption, and competitiveness implied in more disruptive and rapid predictions. This scenario also attempts to minimise reliance on unknown technologies or dramatic reductions in the price of green technologies.
Due to the economic inertia and the sheer scale of the energy transition and capital required, the change associated with this scenario will take decades (see Figure 1). Even if there is an increase in the speed of change, it will still likely be evolutionary, heading towards the 2050 timeline, rather than a dramatically rapid transition. The transition will be achieved while delivering shareholder value (dividend growth, earnings sustainability), with extensive negotiations outside of the business environment with many parties.
Given the immense scale of the change and its effect on people’s lives, this has and will become a political issue. Representatives will therefore make efforts to ensure that the energy transition is not disruptive to national businesses, economies, and populations. Any agreement will take time to develop, giving businesses and consumers time to react.
With the cost and scale of the transition, all options need to be considered as there is not one alternative with the size to replace everything. This scenario sees a strong role for carbon capture and storage (CCS), biofuels, and carbon offsetting as key technologies that leverage the existing energy infrastructure to mitigate carbon, whilst continuing to extensively burn hydrocarbons for fuel.
This scenario sees industry being able to reach zero direct emissions, via a combination of efficiency, electrification, and CCS. It is based on the premise that there are still some operational energy efficiency gaps, but most significant energy efficiencies require capital step changes (it is KBC’s opinion that these are economic today) and that electrification of process heating is technically immature.
Outside of the industrial context, the biggest source of emissions is the complete upstream and downstream supply chain, each with high levels of fuel combustion. This would be transformed through the electrification of transport, as KBC has previously written. This too would be an evolutionary change.
Hydrogen, in particular green hydrogen (H2), is being discussed as an alternative standalone transportation fuel. However, many are looking at the potential of H2 and refineries to be the source of blue H2 at scale.
Carbon capture, (re)use, and storage (CCUS) is assumed to take up a strong position going forward, with an expectation for hundreds of billions to be spent on the development of the technology. CCUS is particularly suited to large static sources, for instance steam reformers for hydrogen generation, which work with the likely scenario of increased industrial fuel substitution with hydrogen.
If the hydrogen is generated centrally, combined with CCS, within an industrial complex, then the hydrogen infrastructure already exists, and the safe distribution and storage of fuel can be carefully controlled. In this situation, most of the existing infrastructure and control schemes could be modified, rather than replaced.
There are similar hurdles to electrification, over lack of H2 charging infrastructure and also additional barriers in terms of the safe distribution and storage of fuel which are normally only handled within regulated industrial complexes. Liquid transport fuels, therefore, will transition toward lower carbon content through the incorporation of biofuels. The key challenge here is commercialising the next generations of biofuels (biofuels from waste, agricultural by-products, and algae).
Profiting during the evolution
The Evolution not Revolution scenario offers a more favourable decline regime, with relatively slow changes, pockets of high-value specialist niches, and a mechanism to continue to extract value from existing infrastructure for many years. Under this scenario, two business strategies generate value and offer excellent returns.
One option is to become the lowest cost producer via operational efficiency and economies of scale. Companies can thus maximise the harvesting of value by staying in business after others have exited. This requires utilisation of technology through digitalisation, minimisation of operating costs (including, for instance, maximising energy efficiency), and investing the minimum to comply with regulations, along with well-timed retirement of excess capacity. An example of this is Saudi Aramco which, relying on very low production costs and a huge economy of scale, has stated aims to be the lowest cost producer and the desire for the last barrel to come from its region.
Alternatively, companies can focus on maximising the value of new, with non-disruptive products such as biofuels and petrochemicals. This does require significant early investment to grow a market position in these segments. An example of this is Neste, for which 70% of its profitability is now derived from biofuels.
Plausible Disruption scenario
This scenario is based on dramatic price trends occurring in the renewable power industry where electrification becomes economically superior to carbon capture and bio-feedstock substitution (as a means to decarbonise), regardless of policy or carbon dioxide tax. These changes could plausibly shock the global energy system in a much more disruptive manner and have profound implications for fossil fuel demand and the relative appeal of CCS, biofuels, and carbon offsetting.
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