Betting on different horses: Decarbonization and Energy transition

Wind turbines and solar panels against blue sky with blur

In a recent experts survey, DNV, the independent consultancy in risk management and assurance, reveals an industry that is increasingly shifting towards decarbonization and the energy transition. Some 80% of respondents say they now plan to increase or maintain investments in renewable energy projects and portfolios in 2021 – up from 71% one year ago. Within that, the proportion that are planning increases (57%) is much higher than last year (44%), and is also far higher than those planning increases in either oil (21%) or gas (37%) in 2021.

Energy transition is the process of reducing greenhouse gas (GHG) emissions to ‘net zero’ (i.e. where remaining emissions are balanced by removals of emissions from the atmosphere). This is also called the ‘decarbonization’ of the energy system. The major source of GHG emissions is the burning of fossil fuels for energy.

Overall, 62% are now actively looking for opportunities outside of oil and gas – up from 51% a year ago. “I think it’s clear that the cost of capital has fallen for low carbon energy,” says Michael Cohen of BP, “and it’s clear that it has changed in the opposite direction for certain hydrocarbon energy developments.” Each year DNV askS oil and gas professionals to elaborate on their indication that their organization is investing outside of the traditional oil and gas value chain. Between 50 and 70% of these respondents expect to invest in CCS, wind, hydrogen and solar in 2021. This range highlights the diversity of transitions in motion. Many organizations are already showing that their expertise in oil and gas is transferable to new domains. Singapore rig-builder Keppel Offshore & Marine, for instance, is turning its expertise in offshore engineering, design, and procurement towards the renewables sector. “Over the past two years, we have secured projects to support the offshore wind industry, such as building offshore converter stations and substations for offshore wind farms in Germany and Taiwan, and building a wind turbine installation vessel,” says Chris Ong, the company’s CEO. “With the accelerated development of the offshore wind industry, we expect further opportunities as wind farms and turbines get larger and are built further offshore.

Capital, costs, returns – financial factors are the primary barriers to both investing in renewables and to decarbonizing fossil fuels and/or operations. However, the drivers are different. Oil and gas companies are investing in renewables because they have shifted their long-term strategy and see current business opportunities.

Meanwhile, climate targets, government policy and regulations drive companies to decarbonize fossil fuels and/or operations. Multiple transitions in motion for some, the energy transition is the biggest challenge their organization has ever faced. For others, it is an opportunity to improve the planet and profit at the same time. It can also be both of those things. It is tempting to describe the energy transition in unified, global terms, but this is not what is happening on the ground. Instead, dozens of different kinds of energy transitions are unfolding in parallel with the evolution of decarbonization and energy efficiency measures. For the industry, this makes identifying the right opportunities – and the right time to take them, a key test. Across the spectrum of renewable energy sources, energy storage, decarbonized gas and energy efficiency, the supporting organizations, technologies and infrastructure are all now at different levels, moving in different directions and at different rates of progress.

 All of this shapes and is shaped by national and regional energy and environmental policies, which are also moving at different rates, in different directions, and from different starting points.

As Cohen puts it: “Companies all over the world are struggling to understand how to make capital allocation decisions when we don’t know what the policy landscape will look like, and we don’t know what the technology landscape will look like.”