Navigating the energy transition from disruption to growth Energy and industrial companies are positioned for a lower-carbon future

26 June 2020

A new Deloitte report says 89% of energy and industrial executives are working toward a low-carbon future. The report's authors, Stanley Porter and Kate Hardin, discuss the long- and short-term future of the energy sector.

“It’s great to buy an electric vehicle, but if you are charging that car on power that’s generated on coal, you’re not really making a big difference. If you’re charging that car on power that’s generated with renewables then you are making a much bigger difference in terms of carbon reduction.”

—Kate Hardin, executive director, Energy and Industrials Research and Insights, Deloitte Services LP

Tanya Ott: Many places have made good strides toward moving from fossil to cleaner sources of energy. But there’s still a lot of work to be done … and big challenges. We’re going to talk about it today on the Press Room.

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Tanya: I’m Tanya Ott. Here’s the good news, if you can call it that. The shelter-in-place mandates that many of us have lived under because of Covid-19 have led to a significant reduction in carbon emissions and pollution in places around the world. In February alone, China saw a 25% reduction in carbon emissions.1 Globally, traffic was down nearly 40% by early April and in one of the hardest hit areas—New York—it was down nearly 50%.2

This comes on the heels of a new report by Deloitte that finds that while many companies in the energy and industrial sectors are prioritizing renewable energy, they may face some challenges, including the global economic downturn caused by COVID-19.

I invited two of the authors of that report to join us today. Stanley Porter is vice-chairman of the Energy Resources and Industrial practice for Deloitte Consulting LLP and Kate Hardin is executive director of the Energy and Industrials Research and Insights practice for Deloitte Services LP. They’ve both worked in the industry for a very long time—through other economic downturns and collapses of oil and gas prices.

Stanley says they started their research for this report in January—before COVID was a major international concern. We start our conversation with what industry leaders told them about planning for a low-carbon future and then examine how COVID factors in.

Stanley Porter: We surveyed around 600 executives—we looked at oil and gas executives, power executives, chemical executives, and executives from industrial industries—and the environment does stand out. Over 70% said the environment is part of this commitment, but very loud and clear that the benefits for competitive advantage and reducing costs are right there. You also see an overwhelming number of the executives—around 89%—have plans in place or are developing plans to execute this low-carbon future. It is business. If I focus on power for a minute, coal used to be 45% of the power demand being generated. And that was around a decade ago. Now it’s down to 23%. So you actually see a movement by participants and by consumer behavior. Then on the renewable side, you see a significant decline [in the cost of] of renewables, therefore being more attractive, therefore being more in use. Today in the United States, around 17.5 [%] of power demand as renewables and that number is expected to go up to around 38% in 2050. So it’s business. It’s climate. It’s customer demands that’s driving the transition.

Tanya: I would imagine it’s also technology because even in that last decade that you’ve talked about, the technology’s changed a lot.

Stanley: Absolutely. Specifically around energy efficiency, 70% of the executives reported that they are able to make these commitments and progress due to technology, specifically digital. So technologies play a very large part. You would see around the technology—not just for the first time, and Kate, keep me honest— but there is this notion of decoupling. Typically when you have GDP [gross domestic product] growth, you assume a growth in energy consumption and then you always worry about emissions as we grow. But for the first time, you’re seeing kind of this decoupling to where you have, I believe, it’s around 25% growth in GDP, Kate?

Kate: The growth in GDP has not given us the same growth in electricity demand, for example, and where we’ve actually looked at how energy-intensive that demand is, it’s much less. And we really put that toward energy efficiency, as we mentioned before. That’s not just in terms of power, utilities, and oil and gas companies. That’s also in terms of buildings. We have HVAC systems that are more efficient. We have new building temperature-management and environmental controls, management systems that are much more efficient. Fuel efficiency standards for vehicles have a huge impact on refined product demand. This is where we’ve already begun to see some of the gains from the early moves toward energy transition.

Again what’s interesting here is that we can all know many technologies that are much watched now, such as battery storage, for example. We know that the cost of lithium ion batteries has declined 87% since 2010. We’ve seen that cost fall. But what’s interesting here is that that, of course, is significant for renewables and it’s significant for electric vehicles and it’s significant for efficiency, but we now have a lot of the oil and gas companies watching that closely as well, making investments in that new technology. We’ve seen over the past two or three years the number of transactions that some of the major oil and gas companies are making in battery storage beginning to really creep up. We’re seeing this almost convergence of different players hoping for, investing in, and watching similar technologies. And carbon capture and storage is a similar one where it’s very important for the oil and gas industry, but also for industrial applications. So that’s been, as you point out, a big driver in advancing this transition.

Tanya: We’ve mentioned a whole lot of areas in which this kind of transition is taking place. I would love to maybe drill down into a concrete example—it could be electric vehicles, it could be cleaner fuels—and have you really explain how that transition has happened and what it looks like right now.

Kate: Let me jump in on that. We’ve talked a little bit about the power sector already and how lower cost, domestic gas has really replaced coal in the US power sector. And that led to a substantial emissions reduction in 2019 for the United States as a whole. The power sector is really a first mover here, and it’s important to recognize that as the power sector decarbonizes, there’s the multiplier effect, which means that the people who are drawing their power are also using cleaner energy. We talk in terms of electric transportation. It’s great to buy an electric vehicle, but if you are charging that car on power that’s generated on coal, you’re not really making a big difference. Right? If you’re charging that car on power that’s generated with renewables, then you are making a much bigger difference in terms of carbon reduction. So that’s one example.

If we look over at the oil and gas industry, for example, we’ve talked with producers who have said that there is a real interest from the customer on sourcing what we call green gas. So natural gas is a fossil fuel, but nevertheless, you have ways of producing that, that means your operations are lower carbon, you’re reducing your emissions in the production of that. And that, from a customer point of view, differentiates that gas from others. I also want to come back here to the point that the customer plays a big role in this. Many of the companies that we surveyed responded that customer preference and competitive edge vis-a-vis customers and their preferences w[ere] a key driver for their move toward decarbonization.

Stanley: An example of technology’s influence on this topic is you’re beginning to see third parties, people who aren’t incumbents if you will, begin to participate in this space. So what does that look like? It’s called energy as a service.

Tanya: Tell me what that means.

Stanley: When people start installing technology into their homes, you start moving into this world of data. Third parties, i.e., not your local utility, are beginning to use technology and data to, particularly for what we would call commercial industrial customers, begin to take the burden, the risk and some of the cost off the balance sheet of businesses by saying, okay, I now have the ability to understand how much you need. I have the ability to, through storage, now bring you renewable energy so you can pass it on to your customers. So energy as a service in its most simple terms is a third-party provider, removing the energy off of customer balance sheets by providing them the generation, by providing them the resource, by providing them data that allows them to say, all I really want is reliable energy at the most effective cost. And can you provide it?

This could be the utility or this could be a third party not associated with the utility. And so this goes back to creating new opportunities, but also pressure on incumbents to change. But it’s the technical, the finance, the delivery mechanisms that allow—again, this is more for commercial industrial customers—to have a turnkey service around their energy procurement and use.

Kate: Let me just give you an example where we’ve seen a lot of companies looking at ESG reporting.

Tanya: What is ESG reporting?

Kate: That is environmental, societal, and governance. How do they track their GHG (greenhouse gas) emissions? There are a whole series of very well-defined criteria that then go into this kind of reporting. That’s a growing movement around the way some companies then are reporting and analyzing how they’re moving not just toward decarbonization, but toward other aspects of environment and areas like this that are important. We’ve also seen sustainability funds where we have institutional investors and portfolio managers who have put together funds that are made up of companies that have investments in renewables or what have you. Even during the downturn, we’ve actually seen that the returns from those funds have in some cases outperformed conventional benchmarks. So what we’re seeing there is an economic incentive. Back to your question about is it all about the environment or is there some business sense as well? I would say, yes, there is business sense in this. So again, it also comes back to what the customers are interested in. It’s not all about financial incentives. It’s very much also about the customers and increasingly employees of a lot of these places. These issues are important to them as well. And companies appreciate that and are making some moves along those lines, too.

Tanya: What are the challenges that come along with this? I’m thinking, managing consumer and shareholder expectations is something that have got to be front and center.

Stanley: There are several. There’s stranded assets. Capital intensive companies, not just oil and gas, but if you look at the oil and gas sector, they make 20- and 30-year-horizon bets. So the implications of either not being prepared, or some would ask, are they really committed, and the data from the survey says they are committed, is because you have to begin to make decisions if your portfolio is changing because you have to think about the assets that may or may not be able to be used. One of the biggest implications for companies is looking at their assets, looking at their customers, the trajectory of change, and how they have to change not only what they produce, but their asset mix that produces the source of energy that is required. But at the end of the day, as I mentioned, you’re going to have renewables come up, but you’ll still see some fossil in certain pockets because this is going to be a regional dynamic at the pace of change.

When some people think regional, my earlier comment that, the United States is 17% renewables but Europe is already in the thirties; in the United States, we have regional differences that will impact this transition. But technology, back to one of your earlier points, when you have utility-scale storage coming on such that you can come off the grid and actually have power stored and used, you’ll begin to see pockets where it’s most feasible to use wind. Where it’s most feasible to have solar kind of come into play. But this is going to be a regional event.

Tanya: At the beginning of our conversation, we talked about how you did this back in January of 2020. And of course, now we’re in this COVID-19 period of time. I’m sure the industry and others are looking at this and thinking, those six areas that you talked about, technology and customer stakeholder and decarbonization and all of that, how much of that is going to be affected by the economic downturn that we’re experiencing right now?

Kate: That’s a great question. Of course, as we drafted the paper, we realized that we really needed to focus in on exactly that question. I do want to note before going into detail there that overall what we’re seeing is the long-term commitment to decarbonization and the long-term business sense of continuing to move in that direction, continuing to build on the investments already made, does not change in our view. And that’s really what the research has shown us from doing the survey and doing the research for the paper. But in terms of the areas where we might see a short-term pause due to supply chain disruption or need for immediate crisis measures that impact spending and budgets, those areas would be investments in new technology, not surprisingly, investments in new business models, and also looking at the policy directives, because, of course, now policy is focused as much around health care and avoiding the worst parts of the pandemic, so there’s quite a bit of attention on that now. In terms of customer stakeholder, where, again, people are really focused on their health, the well-being, the dislocation they’re experiencing. But we do expect that over time, even in those four areas, we’ll see that attention and energy pick up again, because those are critical pieces of the transition where great strides have already been made and we see those continuing in the longer term.

Tanya: One of the things we’re hearing a lot about these days is what’s happening in the gas and oil industry, gas and diesel. People aren’t out in their cars or their vehicles as much as they have been in the past, particularly with some of the shutdowns in the United States. That kind of begs the question, will demand for gas and diesel stay low or do you see a rebound there?

Kate: Essentially, we’ve seen during March and April, some of the worst months of the downturn, that in some countries traffic was down by 40 or 50%. That would include places like New York state, where we know they were very hard hit by the pandemic. Now we’re actually seeing that traffic bounce back. Bounce back may be a strong term, but we’re seeing that come back faster than we might have thought. And so gasoline and diesel demands will continue to bump up.

There are other areas where we see a much longer recovery, and that would be the airline industry, for example. It’ll take some time for the airline industry to get back to where it was. And it’s interesting, we actually have a consumer-sentiment index in which we do a huge survey internationally and have asked people questions like how quickly do you feel comfortable getting back on a plane in the next three months? For United States respondents, that answer was around 20% of people felt comfortable getting back on a plane. And I’m citing last month’s survey data. We do this on a regular basis, so there will be new survey data coming out shortly. But only 20% of people surveyed felt that they’d be comfortable getting on a plane in the next three months. You can see that for some areas it will take longer than others to recover.

Stanley: There’s a lot of questions and to the heart of it you mentioned we’ve had a reduction in demand. But we can’t forget we also had a collapse in the price of oil.

Tanya: Right.

Stanley: And some would debate if that was happening before, but we’ve had it all kind of simultaneously and we have seen the impacts. But again, you will see an increase in activity. You will see an increase in demand. And then it is yet to be determined, and I land where Kate does, that right now renewables have become more prevalent because of their marginal costs. And as you have lower gas prices, will you see the impacts of the cost of renewables on its own being generated still be attractive when you have low gas prices. Gas prices will increase. We do think renewables is at a point it will still hold, but you will see an uptick in gas prices and then the question will be the demand and consumption of gas.

Kate: Stanley’s made a really good point there, that when we saw demand for electric power—so it’s not only demand for gasoline and diesel, but demand for electric power—fall 10 to 15% in the countries most affected. So parts of the United States, Italy, Spain, now we look at the power demand bouncing back. So overall for 2020, we may be down in the United States about 5%. But that’s significant, right? So what happened was as that demand shrank, there was just less need for all of the generation that could have met that demand. So the cheapest generation dispatched first, as Stanley explained. As we see that demand coming back slowly, there will be need for additional sources of generation, which may include gas. But what’s really interesting, and we talked about this a bit, is that when we looked at the performance of those systems that were running on unusually high levels of renewables due to what we’ve just talked about, the reliance, the reliability was actually pretty good. So people felt like that was a little bit of a test case for what might happen if we saw larger levels of renewables overall going forward as we make even more progress in future years on the energy transition. So that was an interesting kind of snapshot of what we might yet see.

Tanya: So it’s almost like a proof-of-performance in that larger sense.

Kate: Right. In a small test case, which was worth noting, definitely.

Tanya: As we’re in this environment of a worldwide economic downturn and some companies are in survival mode right now, how much budget do you think they can be devoting to this energy transition?

Kate: Well, we are certainly seeing a real cutback in the oil and gas industry. That is no secret. So our conclusions that spending in areas like new technologies and spending on acquiring and investing in new business areas is going to be on hold. The spending really is prioritized around critical needs, not spending in order to protect the balance sheet. Worker safety, all these other issues that have a much more immediate resonance now for companies, which is why we have been careful to understand that there will be areas where we’ll see some investment in energy transition delayed.

Tanya: Do you see the focus on decarbonization continuing in the longer term or do you think that that’s going to be to some extent a victim of this downturn?

Kate: No, we see that continuing in the longer term. And there are a couple of reasons why. One is because of the benefits that companies expect from decarbonization. So, as Stanley mentioned earlier, there are some cost benefits to decarbonization. We’re seeing that partly in the renewables sector where more and more companies have signed renewable PPAs (power purchase agreements) within the commercial industrial sector. They’re receiving the cost benefit from those PPAs in a way that they hadn’t before, and that growth is still ongoing even in the first quarter of 2020. And another is, as we’ve talked about before, the idea that [with] their customers, this matters in terms of brand and competitive edge to be seen to be doing the right thing in terms of the environment and carbon emissions. Those kinds of strategic factors don’t change, and so for the longer term we still see the emphasis on that very much.

Tanya: Kate, Stanley ... thank you so much for being with us today on the podcast.

Kate and Stanley: Thank you for having us. Enjoyed the conversation.

Tanya: Stanley Porter is vice-chairman of the Energy Resources and Industrial practice at Deloitte Consulting LLP , and Kate Hardin is executive director of Deloitte Services LP’s Energy and Industrials Research and Insights practice. Their new report is titled Navigating the energy transition from disruption to growth. In addition to the oil, gas, and power industries, they also examine how industrial and chemical companies are thinking about a lower-carbon future.

We’re on Twitter at @DeloitteInsight and I’m on Twitter at @tanyaott1.

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