And as financial markets push for greater transparency of the risks and returns of individual investments under different commodity and carbon-price scenarios, oil and gas companies will need to high-grade their portfolios to access market capital at favorable rates. AMSTERDAM - Aggregate fossil fuel demand is set to peak in 2027 - with oil peaking in 2029 and gas in 2037 . Load factors But today it remains unclear whether this can become a business that will deliver attractive returns, outside of specific, advantaged niches. RWE brought together its traditional- and renewable-generation groups, while E.ON integrated its grid and customer businesses to focus on the parts of the value chain beyond energy generation. Financial sponsors are playing an increasingly important role as balance-sheet owners of renewables assets, holding ownership of half of the M&A deals in the energy industry between 2015 and 2017 and more than two-thirds of the onshore-wind projects in 2017. Whereas the first edition of Beyond Performance introduced the authors’ “Five Frames of Performance and Health” approach to change management, the fully revised and updated Beyond Performance 2.0 has been transformed into a truly ... “A European Green Deal,” European Commission, ec.europa.eu. Never miss an insight. RWE also gained more flexibility in dealing with funding needs, since it could use its shareholding in innogy as a liquid asset. A vast majority of independent oil and gas companies remain resource specialists. The inevitable variability in generation must be tackled indirectly either through industrial, commercial, and residential demand and supply management or through radically improved storage. Our research looked at how the competitiveness of the world’s known upstream oil-focused investment projects varies at different carbon and commodity prices (Exhibit 1). "Fewer emissions and lower primary and final energy consumption," states the consultancy. 25–28, international-construction.com. The coronavirus pandemic has created new problems for Germany's energy transition, according to management consultancy McKinsey. How can (re)organization balance legacy core hydrocarbon businesses while also diversifying into a range of low-carbon options? Consultancy McKinsey just published a report with a relatively upbeat assessment about the potential of the EU renewable energy transition. IEA energy balances (historical); Vaclav Smil. We use cookies essential for this site to function well. Finally, at what point, if at all, should companies let the new low-carbon businesses emerge as fully separate businesses with their own corporate leadership and balance sheets. Most transformations fail. BP's stock price has risen among some of its peers over the last month. This suggests the sector’s traditional business model has been under stress for some time now. Found inside – Page 258“How the World Should Invest in Energy Efficiency” (McKinsey & Company report), Diana Farrell and Jaana K. Remes, July 2008, The McKinsey Quarterly (Website registration is necessary to read report. Capital markets are already driving dramatic growth in the value of companies that are strongly aligned with the energy transition megatrend. For instance, households equipped with solar photovoltaic cells can feed any surplus electricity they generate into the grid, thereby acting as both producers and consumers (or “prosumers,” as they have been dubbed) of energy. "This guide can be downloaded from: www.eere.energy.gov/femp/technologies/renewable%5Fpurchasepower.cfm, www.epa.gov/greenpower/buygreenpower.htm, www.thegreenpowergroup.org/publications.html, www.resource-solutions.org."--Verso. t.p. A McKinsey analysis shows that significant new production can be anticipated, even if the expected deviation from the two-degree-Celsius pathway triggers a carbon tax as high as $90 per barrel. The pandemic had particularly slowed the rollout of wind power, the group said in a press release on its latest publication of the "Energiewende-Index," which tracks the progress of Germany's transition. This modeling suggests intermittent operation use cases for light-duty machinery (for example, construction) will achieve parity within a 2023 time frame (Exhibit 4). As the energy generated by renewables cannot usually be stored easily, the energy producers have little or no control over intermittency. Meanwhile, digitization, the emergence of smart devices, and the smart grid are opening up possibilities for consumers to gain direct access to the market. It is high on the global agenda and crucial to meeting the world’s carbon-reduction goals. and fuel efficiency have more than doubled since the beginning of this century. We strive to provide individuals with disabilities equal access to our website. Learn about The UN Paris Agreement, signed by 196 countries in 2016, committed the world to limit warming to 1.5 to 2.0 degrees Celsius above pre-industrial levels. For excavators, by comparison, only 10 to 20 percent of machine revenue and 30 to 40 percent of service parts and maintenance revenue is tied to the ICE and associated parts and components. A huge contribution to decarbonization comes from electrification , which also makes other sectors such as transport cleaner, and from the . Something went wrong. Energy transition: Mission (im)possible for industry? We strive to provide individuals with disabilities equal access to our website. Those that elect to–or continue to–follow the resource specialist archetype primarily need to get better at what they already do. Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. Whether your goal is to build an effortless capsule wardrobe, keep up with trends, buy quality, seek out ethical brands, or all of the above, this is the book for you. The Conscious Closetis not just a style guide. Intermittency means that energy sources are not readily or continuously available for electricity generation. For example, OEM equipment sensors may reveal potential machinery failures, triggering proactive repairs to avoid equipment downtime. And in an unprecedented global decision, Denmark has cancelled all upcoming North Sea licensing rounds in anticipation of ending oil and gas production in the North Sea by 2050. “The post-COVID recovery: An agenda for resilience, development and equality,” International Renewable Energy Agency, June 2020, irena.org. The events of the past year, as a recent report by the International Renewable Energy Agency shows, have “sharpened investors’ interest in sustainable and resilient assets, including renewables.” By reimagining their business models, they can position themselves to capture new opportunities, offset revenue losses in aftermarket parts and services, and help customers achieve their sustainability objectives. McKinsey projects a 2029 oil demand peak, accelerated by Covid-19. Download as PDF: English | عربی AR. Solar and wind energy could not be generated at utility scale without government support. cookies, McKinsey_Website_Accessibility@mckinsey.com, electrification of the construction, transport, and industrial sectors, Visit our Renewable Energy & New Downstream page. While hydrogen is not the only decarbonization lever, it is an essential lever among a set of other technologies. In recent weeks, more than 35 companies operating in Houston, including a number of notable energy firms, have signed on to a letter of support for the Houston Energy Transition Initiative. 3 Energy Transitions: Adapting to the N ew Normal of the Changing World Scientist Vaclav Smil, one of the pioneers of the idea of energy transition, argues that the diesel powered engines of the 1900s allowed for a much more rapid global-ization than steam powered engines could1. Time is of the essence. If you would like information about this content we will be happy to work with you. Financial institutions can provide capital at a lower cost, and they find the returns from energy projects more attractive than those from traditional alternatives, such as government bonds. Taking the Hydrogen Council's vision for hydrogen to the next level, the study entitled Hydrogen, Scaling up outlines a comprehensive and quantified roadmap to scale deployment and its enabling impact on the energy transition. The deal allowed RWE to separate its growth business from its legacy operations and create two entities with distinct portfolios and a clear strategic focus. our use of cookies, and With a carbon price of $100/ton CO₂e, this share drops to 80 percent overall. With no carbon price, 90 percent of all defined oil-focused projects are projected to break even at or below $60 per barrel. Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. Demands for oil companies to standardize reporting of greenhouse gas emissions produced by operations as well as entire value chains are growing. Start-ups and disruptors are taking a more targeted approach by providing specific modules and technologies, such as batteries, e-motors, electric drivetrains, battery-charging infrastructure, hydrogen fuel cell systems, and more. Kevin Sneader, McKinsey global managing partner, said: "Our aim is to be the largest private sector catalyst for decarbonization. More specifically, what role could financial institutions play in the energy transition and the emerging energy landscape? establishing hydrogen as a key component in the energy transition. 5 Please click "Accept" to help us improve its usefulness with additional cookies. Along with cost, quality, and machine uptime, enabling customers’ sustainability requirements has become an expansion of distributors’ repair and maintenance operations, covering a need not yet served by OEMs. BP. This increases the likelihood of more drastic political interventions triggered by deepening public awareness of environmental threats, as well as commercial interventions driven by economic considerations. There are two important steps leaders can take to strengthen their positions, beyond no-regrets decarbonization of their operations and supply chain. 12. Thanks to these economics, solar and wind power generation will grow five to ten times faster than any other power-generation technology will in the next few years. For more on this organization, see “About Neste,” neste.com. 3. Analyst - Climate Scenarios/Transition Risk and Energy, Planetrics McKinsey & Company London, England, United Kingdom 3 minutes ago Be among the first 25 applicants The second question is whether low-carbon markets can offer returns comparable to the existing hydrocarbon core in oil and gas portfolios. Generators prefer a higher load factor because it increases predictability. "Join us," said Le Camera in closing. and energy exploration, production, and distribution. Found inside – Page 264Global Energy Perspective 2019: www.mckinsey.com/industries/oil-andgas/our-insights/global-energy- Reference Case. Energy Insights by McKinsey (January 2019) perspective-2019 20. Global Energy Perspective: Accelerated Transition. “The Open Group launches the Open Footprint™ Forum,” August 25, 2020, opengroup.org. In North America, for instance, bankruptcies rose starkly in 2020, with nearly 85 Chapter 11 filings by industry players through October. The Partnership developed the comprehensive plan to guide the Houston Energy Transition Initiative (HETI), in conjunction with the Center for Houston's Future and McKinsey with input from more than 60 leaders of industry . “2030 climate & energy framework,” European Commission, ec.europa.eu. tab. Scope 3 emissions, which are associated with the use of the sector’s products, remain the dominant challenge, at more than three-quarters of the sector’s emissions footprint. It is a way of assessing the steadiness of electricity consumption over a specific period. Among them are employment in power-intensive industries and the renewables sector, and renewable power production. Much existing machinery relies on mechanical drives powered by carbon-emitting diesel or gasoline. For this to happen, low-carbon technologies will need to grow quickly (Exhibit 2). To develop a new platform, additional time will be required for testing, validation, and regulatory approvals. The task falls to each company to assess the implications of transitioning for its product and service portfolios, financials, and sourcing and procurement functions, among other areas, and set timelines for how and when to transition. Even in the case of a delayed energy transition, light product demand will plateau by the middle of this decade. Found insideProviding deep, expert insight and advice for what needs to change and how to change it, this is the definitive book for reimagining and creating a talent-driven organization that wins. While wear-and-tear part consumption will likely be reduced, the transition will create new business opportunities for dealers. Over time, these more sustainable solutions may prove to be economically advantageous. Others are pushing to test the robustness of investments against broader environmental, social, and governance (ESG) requirements. IRENA estimates $110 trillion will be needed to meet Europe's 2050 decarbonization goals, an amount that is equivalent to investing about 2 percent of global GDP per year. “Open letter from the CEOs of the Oil and Gas Climate Initiative,” May 26, 2020, prnewswire.com. Players are betting that they will emerge as the natural owners of some or more of these investment classes based on their capabilities, technologies, relationships, and other incumbent advantages. If you’re looking to build or lead a company that grows consistently not just from quarter to quarter, but year to year ... this book is for you.” —Indra Nooyi, Board of Directors, Amazon; former Chairman and CEO, PepsiCo, Inc. “EU climate action and the European Green Deal,” European Commission, ec.europa.eu. Each company needs to know exactly how much carbon it generates, how much is in its products, how to reduce its carbon intensity, and how to communicate this effectively with regulators, investors, and customers. The centuries-long link among industrial advances, higher energy consumption, and GDP growth is breaking down. Something went wrong. Press enter to select and open the results on a new page. Achieving net-zero carbon emissions goals will require a deep commitment and a collaborative approach from both the private and public sectors. A load factor is defined as the average demand during one period divided by peak demand in that period. Select topics and stay current with our latest insights, By Sven Heiligtag, Jan F. Kleine, and Andreas Schlosser, Fueling the energy transition: Opportunities for financial institutions. “Launch of the Decarbonization Strategy targeting carbon neutrality by 2030 and proposed name change to Lundin Energy AB,” Lundin Energy, January 27, 2020, lundin-energy.com. our use of cookies, and The book brings together global experts to form a big picture of cutting-edge research in sustainable bioenergy and biofuels. CEOs and senior executives across the value chain can approach the energy transition as an opportunity to not only decarbonize the environment but also delight customers with improved convenience and experience. The book, broken down into five overarching strategies for successful sales growth, shares valuable lessons on everything from how to beat the competition by looking forward, to turning deep insights into simple messages for the front line. A new report by consulting giant McKinsey finds that Germany's Energiewende, or energy transition to renewables, poses a significant threat to the nation's economy and energy supply. Something went wrong. A number of oil and gas companies have already set net-zero-emissions targets. 9. IEA energy balances (historical); Vaclav Smil, Energy Transitions: History, Requirements, Prospects, Santa Barbara, CA: Praeger, 2010; “Global energy perspective,” Energy Insights by McKinsey, December 2017. The authors wish to thank Filipe Barbosa, Giorgio Bresciani, Michael Ellis, Will Glazener, Kimberly Henderson, Elif Kutsal, Peter Mannion, Scott Nyquist, Dickon Pinner, Matt Rogers, Namit Sharma, and Kassia Yanosek for their contributions to this article. Andreas Franke, “France cranks up hydrogen plans with 6.5-GW, 2030 target, plays down new nuclear,” S&P Global, September 8, 2020, spglobal.com. Machinery is a very broad sector—construction machinery alone accounts for more than $200 billion in annual revenue globally. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more. Europe has been a hub for renewable energy from the early days. The top ten countries in the world to effectively foster energy transition are all European, according to a new joint report by McKinsey & Company and the World Economic Forum. Reinvent your business. Umesh Goel is a partner in McKinsey’s Philadelphia office, Moritz Rittstieg is an associate partner in the Chicago office, and Justin Sanders is a partner in the New York office. Regardless of the strategic archetype chosen, all oil and gas companies will need to quickly adapt their operating models to build carbon management capabilities. “ExxonMobil announces emission reduction plans; expects to meet 2020 goals,” press release from ExxonMobil, December 14, 2020, corporate.exxonmobil.com. There are three key questions we believe the leaders of oil and gas companies should consider: The following article provides some initial perspectives on these questions, in the hope of provoking further reflection around executive and board tables. In conventional onshore and shallow water, which together are projected to comprise almost two-thirds of global crude production in 2030, 25 to 35 percent are viable with a carbon price of $100/ton CO₂e. Our energy transition strategy is a key part of Shell's Powering Progress strategy, which aims to accelerate the transition of our business to net-zero emissions, in step with society. 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