Three
game changers for energy
New
sources, mobility, and industry fragmentation are set to disrupt the system.
Change is afoot in the energy system. Soaring
demand in emerging markets, new energy sources, and the likely growth of electric vehicles (EVs) are just some
of the elements disrupting the status quo. It is hard to discern how the
aftershocks will affect the extraordinarily complex network of sectors and
stakeholders. New research by McKinsey and the World Economic Forum has
identified the game changers for companies and policy makers, as well as their
implications.
An array of energy technologies seems poised for a breakthrough. Within two decades,
as many as 20 new energy sources could be powering the global economy,
including fuel cells; small, modular nuclear-fission reactors; and even nuclear
fusion. Fossil fuels will still be part of the mix, but renewables’ share is
likely to grow owing to environmental concerns, further cost reductions that
make renewable energy more competitive, and demand for electricity. Electricity
demand is expected nearly to double by the middle of the century, propelled
primarily by economic development in China and India. By 2050, electric power,
which can be generated by low-carbon energy sources such as wind and solar,
could account for a quarter of global energy demand.
An economy based on so many technologies
is unprecedented. The Industrial Revolution relied on steam engines powered by
wood, water, or coal. In the 20th century, oil and gas were added to the mix,
then nuclear fission. The abundant choice on the horizon raises new dilemmas.
For example, where should governments focus investment and research efforts?
Most are minded to keep their options open for the time being in order to
satisfy demand, as well as for cost and environmental considerations. Over
time, though, they might have to choose. Uncertainty about how funding will be
shared between new technologies could slow their development. And if
technologies are in contention, governments might struggle to secure reliable
energy supplies. Securing those supplies, however, will no longer necessarily
depend on access to oil, gas, and coal reserves—access that has long colored
geopolitics. In tomorrow’s world, access to the technologies that harness
resources such as wind, sun, water, or heat from the earth’s core is likely to
matter most.
Mobility
The way we move around our ever-spreading cities
is set to be transformed by technology and the drive to reduce pollution,
congestion, and carbon emissions. Center stage is the electric vehicle. EVs
still have high upfront costs compared to conventional vehicles, but thanks in
part to the falling price of batteries, they may be competitive by the
mid-2020s. By the mid-2030s, our research shows they could account for between
27 and 37 percent of new-vehicle sales, depending on the extent to which
regulation, technology, ride sharing, and self-driving vehicles further reduce
costs and boost EV popularity.
These factors present a range of potential
consequences. For example, global demand for liquid fuel used in light vehicles
could fall by between two million and six million barrels a day (a drop of
between 8 and 25 percent), helping to make the chemical industry, not
transportation, the source of demand growth for these fuels. Oil companies
might need to rethink their strategies as a result, perhaps acquiring more
acreage to support production of naphtha or natural-gas liquids—key feedstocks
for chemical plants. If mobility patterns change rapidly, city planners could
find themselves in a matter of years with expensive parking lots that stand
empty. And if the cost of moving around cities in self-driving, shared vehicles
falls to the point where it matches the cost of using public-transport systems,
passenger numbers and revenues for these systems could fall, potentially making
them harder to maintain.
Fragmentation
For the past half century, large players
have dominated energy markets. Today, technology is spawning many smaller
operators at the same time as new sources of capital emerge. Public markets and
governments were once the only investors in the energy sector. But with many
governments now cash-strapped, pension funds and private-equity firms are
taking up the slack. In the past five years, private-equity firms invested more
than $200 billion in the sector, matching new ideas and business models with
capital hungry for returns. This fragmentation is diminishing the power of
scale to shape markets.
A large number of shale gas and oil
producers in North America, for example, make uncoordinated decisions about
supply, challenging the ability of the Organization of Petroleum Exporting
Countries to influence prices. Large utilities have to factor into their
strategies the growing number of cities, businesses, and households that
generate their own energy from renewables, often selling surplus back to the
grid. And governments could find it harder to implement effective regulation.
Rules around drilling, water disposal, and public health and safety are already
being tested in North America because of the speed at which the number of oil
and gas producers has grown. And distributed power generation has sparked
regulatory questions about how to charge grid users equitably. Assuming it is
wealthier consumers who can afford to install solar panels, the cost of
maintaining the grid falls to a smaller number of less affluent households.
As scale in some areas diminishes in
importance, agility takes precedence. With so many players interacting in so
many different ways in so many different locations, it is harder than ever to
predict the future. Billion-dollar investments in assets that must be
productive for three decades or more become far too risky. Instead, companies
will need to make smaller initial investments and be able to adjust their
strategies rapidly as circumstances change or local conditions dictate. Local
differentiation carries increasing competitive weight. In oil and gas, service
providers increasingly tailor their offerings not at the country or even regional
level, but basin by basin; power companies may need to consider different
strategies for different cities depending on the choice of feedstock and the
numbers of residents and businesses producing their own energy.
Ironically, fragmentation is likely to
encourage more partnerships. While these are already commonplace in oil and
gas, where companies split the cost and risk of large capital projects, one
might assume that smaller assets with lower costs and risk would have less need
of them. Yet with a rising number of participants in an energy system where
local differentiation counts, the reverse could be true.
The speed and scale of change in the
energy system will depend on the pace of technological advancement—in
establishing cheaper, more efficient power storage, for example—and on
government policies and regulation. Unless system participants start to plan
now, they could find themselves left adrift.
Download the full World Economic Forum
research paper from which this article is drawn, Game changers in the energy system: Emerging themes
reshaping the energy landscape (PDF–2.87MB).
By Nikhil Patel, Thomas Seitz, and Kassia Yanosek
http://www.mckinsey.com/industries/oil-and-gas/our-insights/three-game-changers-for-energy?cid=other-eml-alt-mkq-mck-oth-1704&hlkid=0115a77807114a4aac79686870fde567&hctky=1627601&hdpid=187b9d81-5c00-41e4-983f-3f35e9612000
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