A decade of change for the energy sector

As we enter the new decade, energy companies will continue to diversify their businesses and the move towards renewables will accelerate.

The world has never been more aware of the importance of conserving resources and reducing carbon emissions. Nowhere is this growing consciousness more keenly felt than in the energy sector. Companies need to navigate increasingly demanding taxation regimes and government policies as well as the negative perception connected to fossil fuel taking root among the general population and brought to the fore by the likes of Greta Thunberg and Extinction Rebellion.

Besides the mounting social pressure on businesses, they must also consider the business imperative. This entails formulating long-term plans that insulate them from macro-economic and geopolitical volatility, and the prospect of a skills shortage because younger generations are less inclined to choose to enter an industry still trying to shake off an old and outdated image.

Against this macro-economic background, I believe there are a number of trends we will see begin to emerge in the energy sector.

New investment in energy will focus on renewable/sustainable sources

As I predicted at the start of this year, demand for energy will increase as the equivalent of a whole new China and India are added to the planet’s global energy demand by 2030. In light of this projection, I think we can say with some confidence that into 2020, oil and gas demand will remain high, while demand for renewables increases at a rate of double figures each year.

The first and most obvious change in the market is that energy generated from renewable sources is going to increase dramatically. Figures from the International Energy Agency (IEA) suggest that by 2023 renewables will be in double figures as a percentage of the energy mix overall, and that the size of the market will grow by one-fifth between 2019 and 2024. CNBC issued a more pessimistic forecast as recently as November 2019. However, consumer demand for renewables has never been higher and this is likely to increase worldwide.

In fact, the IEA has suggested the world’s total renewable-based power capacity will increase to the equivalent of the US’s current power output. One notable point when considering these forecasts is that the estimated proportion of renewables goes up every time the organisation makes a prediction. In 2017, it was suggesting increases into the next decade would be small and would not reach double figures; every year the outlook becomes more optimistic.

Even as wind and solar power are becoming more reliable and cheaper to install, I predict that in 2020, oil and gas will continue to meet around 50 percent of our energy demand (before a sharp decline in around 2030) while renewables will continue to grow. Fast.

Traditional business models will evolve as major energy companies diversify

Feeling the pressure to build a business that is sustainable in the long term, a number of traditional oil and gas companies have started diversifying and indeed marketing themselves away from being purely oil and gas concerns.

Statoil, now called Equinor, is the Norwegian state oil company. The name change signals its intention to look beyond fossil fuel to satisfy demand, as does its investment in wind farms in the UK and Germany. In the same spirit, Shell, which is known for oil and gas extraction, refining, and trading, is now retailing not just domestic energy but also broadband, smart home technology and boiler servicing. In the world of telecommunications, we can see similar moves by companies like Virgin, which is looking at allowing its cabling infrastructure to be used to carry charges to electric vehicles.

Not all will choose these specific routes of diversification, but all companies in the oil and gas and power generation sectors will diversify in some way – whether that’s bringing alternative power generation methods into the mix or using a company’s offshore expertise to pivot from fossil fuel to supporting offshore wind farms.

I predict that in 2020 we will see many household names changing their businesses and offering new or peripheral services. This is not really “servitization” – it is much more. Major players will expand to dominate an energy value chain end to end or react to an adjacent opportunity, leveraging existing infrastructure that can be exploited relatively easily.

The move to renewables and the complete willingness of the industries to adopt new business models are going to characterise the market in 2020 – as long as they continue to succeed this should give us hope.