The reinvigoration of renewables

27/07/2020

It looks positive for renewables, particularly as we enter the wider energy transition beyond just power, according to Allan Baker, head of Energy Advisory & Project Finance Emea at Societe Generale and a member of the ‘Is the Energy Transition Accelerating?’ panel arranged over webcast by The Petroleum Economist on 4 June 2020.

The Covid-19 crisis could help the further development of hydrogen, helping to concentrate the minds of governments and the European Union on redirecting development funding to a long-term energy policy.

This kind of support, especially if it translates into incentives, presents the possibility that the development of hydrogen production capacity could move very quickly to green. As we stand, the market is expected to open with blue hydrogen, due to the cost differentials between two variants of this energy source.
While hydrogen production is getting a lot of attention, we are also seeing the beginnings of investment in the transmission and distribution infrastructure that will be critical for the wide-scale expansion of the hydrogen economy.
Looking at mobility, for example, as for electric vehicles, a hydrogen economy requires a huge investment in distribution channels. This is starting to happen for electric vehicles with charging networks springing up and getting financed and accepted as a future business, so why not for hydrogen?

A following wind

More established renewable energy sources, such as wind power, have developed to the extent that they are becoming more competitive, with continuous cost reductions being delivered from scale and technology.

Typically, we are now looking at 1,000 megawatt projects in offshore wind, which requires several billions of dollars of investment. This scale has attracted European oil and gas companies to the sector as part of their transition strategy, although those in the US are less advanced, with US offshore wind in its infancy and little apparent interest in participating in this business in Europe or Asia.

While public and political perceptions are aligned with the need for decarbonisation, renewables will not take us the whole way. The energy transition is a much wider transformation of the energy economy, and is a journey rather than a single event, so we also need to establish the role of fossil fuels through the transition, even if this is a declining role.

For instance, LNG remains vital to decarbonisation and the energy transition, at least while hydrogen overcomes practical hurdles, such the cost but also the development of a transportation, storage and distribution infrastructure, and other transition technologies find their place.

The transition and fossil fuels

There has been an undoubted seed change in the perception of the oil and gas industry, with the way companies are approaching energy transition increasingly being factored in by investors and credit ratings agencies. And, as the consumption of oil plateaus and then falls, there will come a time when companies will look to monetise the reserves they have. Price competition in a declining market is inevitable and could disrupt the market quite considerably, leading to significant volatility.

One can draw a comparison with the power industry, where the pace of the transition, particularly in Europe, caught traditional utilities by surprise. Many continued to invest in coal plant with a 40-year life, even as the tide was turning against coal as a fuel for electricity generation.

The pace of the transition has been quicker than they expected, leaving them with portfolios of stranded assets. Oil and, to a certain extent, gas companies increasingly face a similar question – is my business model and the new investments I am making today consistent with the energy transition and a low-carbon future?