Why Energy Supply Chains are Transitioning to Renewables

Market Signals Are Changing

When you look more deeply at the demand side of the equation, the case for renewables looks much stronger. In the minds of many consumers and business leaders alike, renewables are transitioning from a ‘nice to have’ to an essential.

BlackRock, the largest asset management firm in the world, can serve as our bellwether in this instance. The firm has announced that it will introduce new funds that shun fossil fuel-oriented stocks and that vote against companies that have not worked strong sustainability goals into their plans. This is not an isolated phenomenon: Norway has been divesting a number of funds of oil and gas investments, especially from high-carbon emission sources like Canadian oil sands. Funds in other countries have followed suit.

Managing Energy Security Risk

The reasons for transitioning to renewables go well beyond the need to address emissions and climate change.

The coronavirus pandemic has given the world a wake-up call about resiliency in supply chain. But there is a more specific term for resiliency when applied to the energy sector—energy security—and it’s something that most developed countries have been pursuing since the 1970s. The US and Canada primarily have the shale revolution to thank for a decreasing energy security risk score since 2007, but now shale is becoming much less profitable thanks to the recent price drop.

The 2020 edition of the US Chamber of Commerce Global Energy Institute’s report on energy security risk couldn’t be more clear: “Countries around the world must still diversify their energy sources, suppliers, and routes to reduce vulnerability to shocks and political manipulation.”

Other sources agree. The IEA World Energy Outlook 2019 report says: “if the world continues along its present path, without any additional changes in policy… energy demand rises by 1.3% each year to 2040, with increasing demand for energy services unrestrained by further efforts to improve efficiency. While this is well below the remarkable 2.3% growth seen in 2018, it would result in a relentless upward march in energy-related emissions, as well as growing strains on almost all aspects of energy security.” (Italics are ours.)

Production Costs Versus Market Price

Meanwhile, the cost of oil and gas extraction has increased tremendously since energy security became a priority. In the period 2000–2012, upstream capital expenditure by oil majors rose 450%, with extraction from shale costs primarily to blame. In spite of the increased spend, production has not risen but declined 6% between 2006 and 2012.

Fast forward to the current state of affairs, and costs have come down overall in the past decade, but not by enough in light of the price drop. Some shale oil producers will be able to stay afloat, depending on their specific cost to produce a barrel of oil, but many won’t. Even considering the recent partial price recovery in summer 2020, margins for some operations are paper thin.

The Shift to Renewables Is Already Happening

While petroleum products are still too useful to abandon entirely, we’ll be burning much less oil and gas for energy in the future. We’re already using more renewables.

According to the International Energy Agency (IEA) Tracking Power Report 2020, “In 2019, renewable electricity generation rose 6%, with wind and solar PV technologies together accounting for 64% of this increase. Although the share of renewables in global electricity generation reached almost 27% in 2019, renewable power as a whole still needs to expand significantly to meet the SDS share of almost half of generation by 2030.”

Circling back to our point about demand, large tech companies with healthy balance sheets have been taking a hard look at energy efficiency. Companies like Google, Apple, Facebook, Amazon, and eBay have massive data centres, and most have made public commitments to renewable energy targets.

• Google announced in 2017 that its electricity consumption had become net-zero on carbon.
• Several eBay campuses and data centres are already on renewables.
• Facebook is ahead of its renewable energy goals.
• While Amazon has faced criticism for falling short on goals, it has still shown steady and significant progress. (Netflix is hosted on Amazon Web Services, so if it reaches its goal of 100% renewables by 2025, we’ll all be able to rest a little more easily.)

While the demand for computational power keeps growing, the tech industry is showing strong signs of keeping pace. Indeed, some companies, like Google, are so good at building solar and wind farms they’re helping other organizations build them too.

Utilities, meanwhile, have noticed that in many locations, solar and/or wind farms produce power more cheaply once they’re up and running. When consumer demand drops, the emphasis is shifted to renewable sources and away from the more expensive fossil-fuel powered plants.

As for oil and gas, some of the majors have already invested billions in renewable energy projects and are “progressively positioning themselves for the proclaimed energy transition”, according to a report by an economics professor at King Fahd University of Petroleum and Minerals in Saudi Arabia.

And although the coronavirus pandemic has resulted in a lot of energy projects—both fossil fuel and renewables—to be put on hold, many of the majors, especially those based in Europe, have reiterated their commitments to long term goals. If the price of oil stays low, renewables will continue to look attractive to anyone operating outside the Middle East.

The Ongoing Forward March of the Technology Enablers

Other factors continue to influence the viability of renewables, especially the improvement in vehicle and utility-scale batteries.

Tesla is not the only company developing the next wave of electric vehicle batteries. Companies like Toyota and others are working on batteries that use lithium-iron (not ‘ion’, in this case) phosphate, silicon, sulfide superionic conductors, graphene, and other materials to achieve faster charge times and greater ranges.

If the progress continues, electric vehicles will be within reach not only for consumers, but for commercial logistics as well.

Another promising technology can be found in hydrogen fuel cells. When the hydrogen is isolated using renewable energy, it becomes a low-carbon, high-energy-density power source, with simple water vapour as exhaust.

Royal Dutch Shell has been developing a hydrogen fuel cell program that offers alternatives for passenger vehicles and perhaps even rail, commercial transport trucks, shipping, and heavy industry. In some areas of Europe and North America, there are already refueling stations in place and consumers can purchase vehicles.

The Rise of Microgrids

Renewable energy goes beyond large-scale hydro, solar, and wind generation. There has been a shift in generation and distribution patterns as well.

Instead of relying on public utilities, some facilities and organizations are creating smaller, private electricity generation and distribution networks, called microgrids.

According to the Guidehouse consulting firm, the “global microgrid market was at about 3,500 MW in 2019, totaling an $8.1-billion market, but that number is due to grow by 2028 to about 20,000 MW and $39.4 billion. Not only in the United States but across the world, microgrids are being recognized as a new frontier in electricity planning due to retirements of fossil-fuel power plants and increases in natural disasters due to climate change such as hurricanes, floods, heat waves and other events that can disrupt the bulk electricity system.”

It’s Just a Matter of Time

Oil and gas companies are increasingly being caught between the pincers of profit margin and opportunity. As the ripple effects from COVID-19 and other conditions continue to play out, there’s no doubt that more upstream energy companies will continue to follow the lead of the European majors that are making renewables a bigger part of their portfolios.