Energy markets faced their fair share of volatility in 2022. Energy demand has recovered from the pandemic, market tensions have led to higher prices in many places (sometimes unsustainably so for customers), there have been security of supply concerns, and a push from customers and stakeholders for energy sovereignty. Though there has been progress out of Europe with the REPowerEU package, market turbulence and uncertainty are likely to persist while Europe figures out alternate energy supplies to replace Russian gas.
But it's not all doom and gloom. Across Europe, and elsewhere, countries are making significant headway with the energy transition and there are a multitude of opportunities to ensure a more sustainable future, including the progress of low carbon technologies.
Looking ahead to the key forces set to shape energy demand, we expect to see the following advances in 2023.
Energy prices and government support
Market reformshouldstart to happen in 2023, with a document expected at the end of March by the European Commission, with three main questions aiming to address the countries' current misalignment:
- Will these reforms be good enough to decouple electricity and gas prices and reflect the real prices, while keeping market fluid enough?
- Will it be voted on this year?
- Will it really lead to lower prices?
In 2023 market interventions by governments will move upstream. Governments will continue to support customers with the costs of their energy through price caps and subsidies, but they will also make direct interventions into energy markets and into energy sources. Examples will include setting caps on commodity prices and entering government sponsored and funded bilateral supply agreements. These interventions may boost low carbon generation (renewables) growth, but also hydrogen. Governments must also reconsider securing investments in large assets (nuclear and networks).
The consumer assets and behaviour revolution is here, triggered by the climate change imperative, security of supply and energy prices. Energy conservation gains are among the fastest, cheapest, and easiest ways to deal with the challenges posed by Russian gas cuts in the immediate term. Energy efficiency, as always more difficult to achieve (as there is no immediate payback for investors), will get to an inflexion point this year, with public programs or incentives.
All players in the energy system will seek to reduce the amount of energy they use through demand reduction and energy efficiency schemes. We expect to see this in areas such as home insulation, industrial process operators further optimising their energy use, and businesses being more frugal on uses such as heating, lighting and refrigeration. European governments, and now the UK, can be expected to continue to roll-out public campaigns to reduce energy consumption over the coming winters.
Security of supply
System operators will step forward and offer more energy flexibility schemes where customers are rewarded for changing their usage patterns to avoid peak periods. We envisage new market players emerging to offer demand response services, with this being a significant market over the next two years. Consumers who are already price and environmentally aware will become more conscious of security of supply concerns and will push for greater sovereign control of energy sources. Finally: capacity markets haven't been successful enough in recent years.
With their deep pockets, European oil and gas companies will move faster into the energy transition and will rebalance shareholder returns with energy transition investments. We also expect some of the US oil and gas companies to accelerate as renewables become more competitive than fossil fuels (exceptingshale gas in the US). Hence the business case for energy transition becomes clearer. US oil and gas companies are also leading the way on Carbon Capture and Storage (CCS). As fossil fuel use is more entrenched than is desired, developing CCS is key to eliminate GHG emissions.
The US Inflation Reduction Act and the European Union's Fit for 55 programmes will accelerate sovereign investment in energy transition programmes. This will further boost cleaner energy sources - wind and solar. We also expect to see the nuclear renaissance continuing, with gas electricity generation investments holding up as a transition to coal. These activities will put increased strain on global supply chains, and sourcing of materials, equipment and minerals will become a key topic in 2023, to avoid moving from a dependence on Russian gas to another on Chinese equipment and critical resources.
In 2023 the shortages in the workforce for energy transition will become more evident, and programs to address this will hopefully be accelerated. These will include cross-training, incentive schemes, and redeployment of transferrable skills between sectors.
Hydrogen and carbon capture
In 2023 the hype for hydrogen and carbon capture will reach a crunch point. There will be increased reality in the conversation about their applicability, cost, and timeframes. This will enable a more focussed conversation about the use-cases and business case that will enable investments and trials to be more precisely enacted.
We see a significant opportunity in 2023 for those governments, companies and individuals that are willing to embrace change and to accelerate their plans. The winners in the energy transition race will be the players who during the crises took ideas, shifted their strategies, and made them into reality in 2023. Winners will have mastered the scale and complexity of major energy transition deployments and will have clearly picked their battles (as it's quite impossible to be on everything, everywhere). The winners will have hyper-scaled their capabilities. And they will have brough their customers and stakeholders with them on the journey.