Fixed vs Floating Foundations
Our Renewables team has produced some analysis on...
Anyway, when considering the energy transition, it is worth bearing in mind these market dynamics. While Big Oil certainly hasn’t built in any limited design life to their dominance in the energy sector, there does seem to be a growing acceptance that obsolescence is a certainty when dealing with a finite resource. While the volume of untapped oil and gas is certainly nowhere near depleted as it stands, there is also no denying that depletion is a future certainty. Therefore, when confronted with a potential for obsolescence, the sensible economic decision is to enter the market for your replacement and begin to establish the basis of an oligopoly.
First movers are not new to this market dynamic. As laid out in my colleague Sofiia Bairamukova’s recent article on the energy transition, company’s like Orsted (formerly Dong), Equinor (formerly Statoil), and Engie (formerly GDF) have been gradually shifting their investment portfolios to focus more on growing their exposure to renewable energy. It is also no coincidence that each of these companies has rebranded as they look to grow their appeal to a new consumer, more likely to make active decisions about energy suppliers, based on how green their electricity is.
It’s no coincidence either that #energytransition has become a buzzword in the energy sector as this market exposure changes. Big Oil is less inclined to lobby against decarbonisation the more exposed it becomes to the economic benefits of any transition. As a pragmatist and a renewable proponent, I’m happy to see this change picking up pace – but unsurprisingly I’d like to see more happen and faster.
Looking at the process objectively, acknowledging future obsolescence is the biggest sticking point – psychologically at least. Once this has been done, planning the process seems the only logical way forward and economically it could result in longer term gains for shareholders if managed appropriately. In a society that is still very much hydrocarbon dependent, but increasingly concerned with decarbonisation, it is sensible to consider those parts of the economy where hydrocarbons can be displaced most simply and with the least economic disruption. This leads us directly to the electricity market. A straight swap for electrons with hydrocarbons, isn’t just manageable, but also more efficient. The main obstacle to a fully decarbonised electricity system is in dealing with intermittent generation, and thus the need for storage – which would seem an obvious investment and market entry point for hydrocarbon investors.
While I don’t have the entire decarbonisation, strategy mapped and ready for explanation (I’d be happy to for a fee…), the concept is a sound one. Understand the target points and trajectories for decarbonisation as a tool to guide investment. By targeting the areas of the economy where decarbonisation is most difficult, such as aviation, then you are also maintaining the longest serving and highest value components of your core business model.
An open and transparent process towards diversification and transition would not only give society a clear signal that an orderly transition to a decarbonised energy solution is underway, it would also allow the workforce and supply chain the opportunity to adapt and adjust accordingly. Investment strategies and academic programmes will need foresight to best serve the new markets, and the lead time on a sufficiently experienced workforce is significant.
Obsolescence therefore represents an opportunity in the right economic circumstances. Reading the runes, it seems as though some early movers have already begun to acknowledge this and invest strategically to gain market position as the transition unfolds. By acknowledging this at an industry level, we could allow policy makers, educators and labour movements the clear signposts required to similarly benefit, while strategically decarbonising the energy sector in a way that avoids an economic tailspin, and also seeks out a path of least resistance from investors that have been slower to adapt.
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