Flush with opportunity and the capital needed to move investment and M&A strategies forward as the rush to decarbonise the global energy system heightens, corporate power and renewables companies need to prepare for rising near-term risk.
Decarbonisation is the lynchpin of the global strategy to meet the 1.5° warming scenario influencing companies’ planning. According to Wood Mackenzie’s new Corporate power and renewables: 5 things to look for in 2022 report, the complexity of achieving project progress with buy-in from investors may be the biggest barrier to meeting targets being set.
Calls for improved disclosure on emissions performance and environmental impact are increasing as investors seek best-in-class performance on ESG, so companies need to outline plans to decarbonise their entire business, including intermediate targets on the road to net zero.
Activist investors will push listed utilities to justify integrated business models and some, such as SSE in the UK, could move to sell-down regulated transmission and distribution businesses, recycling capital into network expansion and renewables capacity growth. In the US, the pressure will be on integrated utilities to divest nonregulated conventional generation assets.
Wood Mackenzie also expects the M&A market to heat up as buyers see acquisition as the most expedient way to capture the growth potential of renewables, and packaging broader low-carbon solutions to help a wide range of end-users decarbonise will also be high on the corporate agenda.
Renewables’ increasing share of the power generation mix makes intermittency a bigger challenge – another failure to keep the lights on in 2022 would severely undermine confidence in utilities’ role in leading energy transition change.
In the wind and solar markets continued pressure on capex, impacted by rising equipment costs, will force auction prices up in 2022. Polysilicon, steel, copper and aluminium pricing, combined with logistical bottlenecks had forced equipment price increases throughout 2021, and companies will now need to work to protect their margins.
Norman Valentine, Director, Corporate Research at Wood Mackenzie says, “Business leaders will need to address a range of concerns to build credibility on how they will deliver competitive advantage in the fast-changing world of the energy transition. Energy system electrification, accelerated renewables growth, battery deployments and expansion in power-to-X will be recurring corporate strategic themes – set against a background of growing competition, rapid technological change and policy uncertainty.”
“Renewables’ growth can’t meet global energy demand at its present rate of expansion and with some project costs doubling or quadrupling in the last year and remaining at those levels into 2023. The Biden administration’s Build Back Better Bill, if approved by congress, will further increase labour costs and force more upward pressure on solar PPAs in the US market in 2022. Significantly greater complexity in project developments’ paths to completion will bring greater risk – where to bid, when to bid and what to bid will be under the microscope, in what is already a complicated process,” Valentine continues.
“At the same time, competition for generation assets is increasing, not least as the European oil and gas Majors (bp, Shell, TotalEnergies, Eni and Equinor) have entered the fray, bringing their deep pockets and ambitious targets. Utilities and energy companies will see demand from corporate clients that want broader decarbonisation packages accelerate in 2022 – with customers, such as industrial and chemicals companies, under growing pressure from stakeholders to confirm their strategies,” he says.
Akif Chaudhry, Principal Analyst, Corporate Research at Wood Mackenzie says, “The number of companies setting emissions targets has risen sharply and many are now aligning with net-zero goals. COP27, in late-2022, will focus on raising ambition for 2030 targets. Scrutiny on tangible corporate progress towards emissions targets will heat up rapidly.”
“Companies need to prove they are meeting their lofty ambitions in terms of decarbonisation at all levels of their operations – to the point of looking at localised grid-edge solutions beyond installing EV charging points outside their premises. Utilities are already in the spotlight, with high-profile, weather-related power outages – combined with spiking prices – and the challenges will only mount as extreme weather events become more common. Expect more announcements on supply contracts from utilities and energy companies involving a combination of low carbon solutions for corporate clients in 2022. This will also be a critical part of utilities and energy companies’ efforts to tackle their own Scope 3 emissions,” Chaudhry continues.
“Strong demand for renewables assets will come from new entrants, institutional investors and corporate energy users seeking to decarbonise supply. Competitive pressures in established markets will see many European utilities position themselves for growth in alternative markets and segments through new partnerships and alliances – and partnering to reduce competition in license rounds,” says Chaudhry.