Inventing tomorrow’s energy system:

The world needs more energy

The International Energy Agency projects that total global demand for the molecules and electrons that power our world will rise by 23% by 2040.  In the near term, fossil fuels will continue to account for a large percentage of the molecules that fuel transport and the electrons that provide electricity and heat. But, taking a longer view, the direction of the energy transition is clear (see Exhibit 1). As time goes on, carbon-free energy sources—chiefly electrons, but a rising proportion of molecules—will account for a greater share of production.

More than 190 countries have committed to the goals of the 2015 Paris Agreement, which include aggressive reductions in emissions. In 2020, investors poured a record US$350bn into sustainable investment funds, more than double the 2019 total. A great deal of capital is being invested into innovation, R&D, technology and scaling efforts that help bring down the cost of renewable energy production, energy storage, green hydrogen and other low- or no-carbon innovations. 

Looking to the decade beyond 2030, renewable energy takes greater market share in the global electricity market, as coal declines and natural gas grows modestly. According to the IEA, by 2040, powered by strong growth in wind and solar, renewables will account for about 47% of the electricity market, up from 29% today. And of course, the ambitions of the world now aim to drive those trends even further (see Exhibits 2 and 3).

The future looks much different

As renewables gain market share and fossil fuels decline, the origins of electrons and molecules, and the paths they take, start to carve new paths (see Exhibit 5). By 2050, renewables will account for more than 90% of energy, and fossil fuels will account for less than 10%. Biomass and waste will surpass fossil fuels as creators of molecules that will be used to heat buildings and power transport and industry. In addition, the capturing and recycling of CO2 will create new flows of carbon molecules. 

But electrons produced by renewables will be the dominant force in this system. They will provide the lion’s share of electricity, fill up massive batteries that will become electricity generators in their own right, power factories, heat and cool buildings and, as electrification hits the transport sector, emerge as a major fuel for cars, trucks, trains and ships. There will also be new paths for electrons to stimulate the creation of molecules—namely green hydrogen, which can function as a fuel for transport or a power source (see Exhibit 5). The final switch to a highly renewable energy system will require a quantum leap in storage for both electrons and molecules, and a rethinking of the role of baseload non-emitting technologies.

Strategic implications 

It is unclear when the transition will conclude. But the direction of travel is clear, and the forces pushing in this direction are immense. The speed of change and the degree of complexity require a strategic response from all participants: national oil companies (NOCs), integrated oil companies (IOCs), utilities, chemical companies, service companies, investors, grid operators, and government entities such as ministries and regulators. For some players, especially the large oil companies, this transition poses existential questions. And a new crop of companies that historically have not been major players in the energy value chain— including battery companies, automakers and green hydrogen shippers—will find they need to adapt as well, because their inputs, supply chains and, in some cases, end products will change markedly over the next two decades. Those that embrace the new energy landscape and create new value from the underpinning disruption while decarbonising their value chains will create strategic and competitive advantage.

Customers as value chain partners

One strategic dynamic at play relates to the role of customers and how they interact as value chain partners rather than as a traditional receiver of goods and services. Industrial companies and other large users already work with utilities to implement demand-response services. They can contract to reduce their usage during periods of peak demand and get paid for doing so. As renewable energy and storage become more prevalent, such balancing services will become increasingly common. Customers themselves may be able to turn themselves into providers of electrons. All players must take far-reaching decisions on how they position their activities and value propositions going forward, recognizing the strategic choices that are faced by each player in the energy value chain.

The road ahead

The next energy system is beautifully complex. Getting the energy transition right is vital in many dimensions: technological, strategic, environmental and economic. The scope of the required investments is starting to become clear and tangible, and so, too, are the benefits. Although the contours of the destination are starting to emerge, many challenges and questions remain as electrons and molecules find new pathways and new roles. It is clear that none of us can make this journey on our own. In all regions, in a range of industries, it will be critical to forge new alliances and develop novel ways of working together across value chains and ecosystems. Industries that were once clearly delineated will converge, transform and re-emerge in new forms. 

The state and the market will have to work together in new ways, both leading and following at different moments, and traditional roles will need to be reconsidered. The exact choices players make is heavily dependent on historical and political context. For some, the collaboration will be familiar and for others it may feel uncomfortable. But the creative tension it unleashes will provide the force for innovation and development. If our systems are to deliver on the ambitious climate agenda the globe has set, the work must begin now.