Energy majors go for a major rethink

If consumers are diversifying their fuel mix, energy firms must follow suit to retain dominance

It was not always this way. Energy majors built their historic wealth in assets such as coal mines, oil wells and gas fields. The value came from discovering and developing these assets across the globe and putting them to market. They obsessed more with adding reserves and worried about hitting the “peak” that is, when they will start to deplete reserves more than add. This may still be the mindset but a fundamental rethink is starting to happen as consumers increasingly take to other energy sources closer home.
 
The growth in commercial energy use, for many years, has come largely from developing nations as their population and economies grew. In the normal course, as these countries matured over the years, their energy growth would have gradually slowed. But the change is coming quicker with many governments investing in energy efficiency programmes and in renewable energy. Already, the energy majors are facing softer demand for their traditional products, causing them to sit up and prepare for the low carbon economy.
 
The recent Reliance-BP deal hints that this is on their mind. They are not alone. Coal India, the world’s sixth largest mining company, has embarked on an exercise to relook at its vision. Canada’s largest power producer, Hydro Quebec, invests considerably in research on electric mobility, which may give it a new set of consumers. Several large Indian companies (the RE100) are committed to sourcing green energy to power their entire operations.
 
This market opportunity is growing fast too and, as such, worthy of consideration. In fact, if large consumers are diversifying their fuel mix, energy majors must follow suit to retain their dominance. The government of India has made its intent clear — to reshape our energy mix, and in the Paris agreement signed up to reducing carbon intensity. This makes a clear statement of the future state of our energy industry and offers an opportunity for new players to enter and grow. The utilities are increasingly opening up to renewable energy, as lower tariffs (ignoring the integration costs) displace costlier supplies in their merit order dispatch. Already, a number of diesel-based power purchase agreements signed in the 1990s have been terminated.
 

Need of the hour: The renewable energy sector will truly benefit from large spend in innovation and market development that improves efficiency and reliability

The renewable energy sector needs new players, too. The flood of newcomers into renewable energy, welcome as they are, have background largely in infrastructure and financing. They are not yet clean-technology players and look good in the reflected glory of declining costs of solar modules and wind equipment. The renewable energy sector will truly benefit from large spend in innovation and market development that improves efficiency (namely, to extract more energy from natural resources) and reliability (namely, to maintain a stable grid even as the more variable renewables are used).
 
The large energy companies have an edge here. They have a culture of dealing with development of high risk natural resources, a technological capability to work in challenging conditions, and deep pockets to invest large capital necessary to reshape the industry. They can change the game in areas like offshore wind power, geothermal, and electric mobility. This can push down costs further. The recently released Bloomberg New Energy Outlook 2017, for example, suggests that offshore wind costs could decline by as much as 71 per cent by 2040, as experience and scale benefits grow with investment. 
 
The government is encouraging large state-owned enterprises with cash reserves to invest in clean technology to drive scale. Unfortunately, this has only led to one-off tenders to set up a solar park or wind farm, which remain small and non-core, compared to their main business. Instead, public sector companies could get together, and pool their resources to invest in more fundamental requirements such as in pumped-storage hydro or in renewable grid integration.
 
The governments are also rethinking their role. In the recent years, the government has phased out production incentives, accelerated depreciation credits and moved away from guaranteed feed-in tariffs to reverse auctions. The interest of investors and flow of funds into clean technology, however, continues undeterred by this chop of sops. There is growing conviction that market economics and customer choice will rewrite the future growth of new energy. The only unknown today is which of the energy majors will be there to tell that story.

The writer is  Partner & Leader - Energy, Utilities and Mining, PwC