How bold action can accelerate the world’s multiple energy transitions

Across the energy system, progress is becoming exponential, as technology matures and scales faster than anticipated. Innovation is beginning to decarbonize those hard-to-abate sectors once considered too difficult to transform, such as steelmaking. 

But while the pace of change is accelerating everywhere, it’s not uniform. Four levers are driving change to our energy system — technology advancement, commodity supply, consumer engagement, and government policy. Our modeling of these levers reveals that the energy transitions of different markets will vary widely, in speed and in nature.

Around the world, governments are making different trade-offs between economic priorities, geopolitical ambitions and environmental goals, based on the availability of resources (commodities, capital and capabilities). These trade-offs are driving policy decisions that send signals to the market and consumers and, ultimately, determine progress.

For example, some economies, including the UK, Europe and the US, have the policies, resources, capital and infrastructure to drive a faster transition. But in Asia and Africa, many governments are prioritizing economic growth and access to low-cost energy. Across the Middle East, oil still rules for now, but some nations, including Saudi Arabia, are pursuing ambitions to become global clean energy superpowers. And even within regions, or in a single country, the story can vary. China is leading the world in wind power — in late July, the world’s biggest wind turbine began operating off the coast of the Fujian province — but also still burns more coal than the rest of the world combined.

We’re entering the decade of disruption

As multiple energy transitions accelerate, we are entering a decade of disruption. A new energy system is already emerging, but our modeling reveals that post-2030 is when we’ll see the biggest changes. By then, solar- and wind-generated electricity will power almost everything (some industries, such as aviation and transoceanic shipping, will remain dependent on hydrocarbons, at least based on current technologies). Renewables will bring supply closer to demand, creating a highly localized energy system, with more opportunities for communities (and grid challenges for power and utilities companies). Oil and gas will still be part of the energy mix, but made much greener, through synthetic and alternative fuels. Consumers, both industrial and residential, will be the primary drivers of change as they adopt more energy technologies and become active orchestrators of a flexible, intelligent electricity grid. 

Globally, green energy will dominate energy generation by 2038, and make up 62% of the power mix by 2050. A solar boom will power many markets, including in South Asia, Oceania and across the US, but in others, particularly Europe, the story will center around wind. Fossil fuel use will peak before the end of this decade, but a complete transition away from hydrocarbons will take longer, varying across markets, and it will be more expensive than anticipated. This is a challenge that we believe has been significantly underestimated. Even the most ambitious build-out of renewables won’t achieve decarbonization unless we simultaneously and aggressively accelerate the attrition of legacy energy assets.

This will require policy that pushes markets in the right direction, making hydrocarbon-generated energy more expensive more quickly, and improving the investor appeal of renewables. Current returns on clean energy are around 6%, compared with double that or more for upstream oil and gas. Intelligent carbon pricing, subsidies and incentives can turn this around and hasten the switch from old energy to new. Policies such as the US’s Inflation Reduction Act (IRA) and the EU’s Green Deal, and REPowerEU plan, are increasing the cost of emissions while also encouraging collaboration, and investment, in clean energy technologies. Within a year of the launch of the IRA, the US’s clean energy sector attracted eight years’ worth of investment, according to the World Economic Forum. Europe’s new target of at least 42.5% renewable energy by 2030 is expected to see 69GW of new solar and wind additions in 2023, a 17% increase on 2022. Global renewable capacity additions are set to jump to more than 440GW in 2023, its largest absolute increase.

With oil and gas as part of our energy mix for some time, incentivizing technology will also help “green the molecule.” We see significant opportunities on offer for oil and gas companies that take the lead here, developing, maturing and scaling a mix of solutions including carbon capture, usage and storage (CCUS), synthetic and bio-hydrocarbons, and alternative molecules such as hydrogen and ammonia. Progress could be accelerated through collaboration across the value chain. For example, Europe’s biggest CCUS project, Porthos, will see CO2 produced by Shell, ExxonMobil, Air Liquide and Air Products transported through the Rotterdam port to empty gas fields under the North Sea. Once operational in 2026, the project is forecast to reduce the Netherlands’ carbon emissions by 2% annually for 15 years, and also cut the Port of Rotterdam’s overall emissions by 10% every year.

With the right regulatory support, returns for green molecules could outpace those for gray by the early 2040s, according to our forecasts. The challenge for oil and gas companies will be balancing a need to invest in new technologies while keeping core assets operating for longer. Every company will need to identify and commit to its own strategic choices. The EY report outlines some no-regret actions oil and gas companies can take.

In every market, energy transitions will only succeed if consumers — residential and industrial — take the lead. But we can’t expect people and businesses to switch because of sustainability motivations alone. Clean energy must be cheaper and genuinely better.

This creates opportunities for power and utilities companies to consider how offering more value to consumers can accelerate their own growth and advance decarbonization. But they’ll have to rip up the old rulebooks about consumer engagement. In a highly localized, mostly electrified energy ecosystem, consumers will produce, use and trade energy differently. Industrial customers no longer want to simply buy power from energy companies, but partner with them. Consider Belgium’s Port of Antwerp-Bruges where a mix of energy companies, industrial players and public stakeholders have built a shared hub for the importation, production and throughput of green hydrogen. Australia has plans to emulate the project, developing its own hydrogen hub in South Australia’s Port Bonython, where energy companies will partner with a range of public and private sector organizations. Collaborations such as these can help energy companies nail their value proposition for industrial consumers which, by 2050, will make up more than half (55%) of total electricity demand, according to our modeling.

Residential consumers are also more engaged in the energy experience, and this will only increase as new energy solutions such as EVs and heat pumps become mainstream. EY research reveals that while consumers in different markets have different priorities, all have higher expectations around personalized, convenient energy options that align with their values. Power and utilities companies that put consumers at the heart of the business can identify these motivations and develop compelling products and services in collaboration with companies from adjacent sectors.