As the oil and gas sector’s biggest markets are set to shrink over the long term, because of moves to decarbonise the economy, a logical question for leaders in the industry is where to seek revenues in future. The good news is that the need for energy will not go away. If anything, it will continue to grow, rewarding companies that can meet demand efficiently and at scale. What will change is the nature of the energy and associated services. One example of a major emerging opportunity in energy markets is the rise of corporations committing to 100% renewable energy consumption. At the end of 2021, the RE100 group included 315 companies with 340 TWh of electricity demand, more than the UK. Some companies, such as Google, are also targeting 24/7 carbon free energy: this means accessing 100% free energy in every location, all the time.
The first impact this has had is to increase demand for corporate power-purchase agreements (PPAs). A report by Pexapark this year estimated that the European PPA market had seen a 58% compound annual growth rate (CAGR) in terms of deals between 2018 and 2021, and a 42% CAGR in contracted capacity over the same period. Not many markets have seen such growth over the same time frame. And some of these deals are massive. In 2020, for example, the retail technology giant Amazon signed a 10-year, 3.4 GW PPA with offshore wind leader Ørsted. Google, meanwhile, has contracted 1.6 GW of energy through PPAs worldwide.
PPA markets, which essentially involve selling energy at an agreed price for long periods of time—often up to a decade—seems tailor-made for the oil and gas industry. The only catch is that most corporate PPAs are based on the provision of green electrons rather than any old power source. That means oil and gas companies can only stand to gain if they are investing in renewable energy alongside their traditional business units. And investing in wind and solar alone won’t quite cut it.
Needing green energy on tap
Unlike merchant sales, where wind and solar plants export whatever they can to the grid and take whatever price is on offer, the reason companies sign PPAs is to have renewable energy on tap, around the clock. Clearly, this is not possible if your energy supply comes purely from intermittent renewables such as wind and solar—it does not satisfy the demands of achieving true 24/7 carbon-free energy.
Hence, financial advisory firms such as Alexa Capital increasingly believe the big opportunity in the energy transition is not in renewables but in flexibility—the ability to turn intermittent low-carbon power generation into a steady supply that can meet demand at any point in time. It is important to note that flexibility is not just vital in the context of PPAs. As grids increasingly run off renewables, they too will require flexibility services. But the need is most pressing right now in the PPA world, because contracts are being signed today that demand clean energy, around the clock.
Flexibility encompasses a range of assets that is, if anything, even greater than those in the renewables space. One of the most obvious asset classes is energy storage, which captures surplus renewable generation for redeployment in times of high demand. Hydro, geothermal, clean fuels such as low-carbon hydrogen and even gas peakers—particularly if combined with carbon capture and storage—can all be considered part of the flexibility mix, by providing top-up capacity when solar and wind are not available to do the heavy lifting.
And flexibility extends to the demand side of the equation, helping to mould grid energy requirements to the availability of power. Demand response could have a significant impact on grid flexibility if deployed at scale. Imagine, for instance, that all a nation’s fridges were set to temporarily stop drawing energy in the event of a demand surge.
The chances are the demand could be met without needing to add further generation, saving grid operators money that could potentially be returned to customers in demand response programmes. An even bigger opportunity lies ahead with vehicle electrification, since all electric vehicles will be equipped with massive batteries that will be standing idle most of the time.
The flexibility opportunity
Using emerging vehicle-to-grid technology, these assets could act as a giant lung attached to the grid, soaking up excess energy when available and giving it back when needed. Some observers predict the value of this service might be so great that electric vehicle owners could make money from their car batteries. Even without vehicle-to-grid, the backup batteries embedded in charging infrastructure could play a similar role and be rewarded by grid operators.
Finally, an important part of flexibility will be the ability to trade and manage large volumes of energy on a second-by-second basis, leveraging incomes not only from electricity sales but also from the delivery of ancillary services such as frequency response and voltage control. For large integrated oil and gas players, flexibility offers many opportunities. The sector is already active in many parts of the flexibility ecosystem, for example through the provision of backup power services and electric vehicle charging infrastructure.
Low-carbon hydrogen, where used for power generation, will also be an important part of the picture. Majors have already jumped at the chance to play an even greater role in this emerging market, with Shell’s acquisition of battery vendor and virtual power plant operator Sonnen as a prime example. BP Launchpad, which scales businesses targeting clean and reliable energy, is another. Meanwhile, the industry’s sophisticated trading platforms are eminently suited for flexibility.
But what is arguably missing is a more coordinated, strategic approach. Far-sighted industry leaders could consider building larger flexibility portfolios alongside renewable generation assets, bearing in mind that in the power markets of tomorrow managing electrons will be every bit as important as generating them. There are also technical and market challenges that need to be overcome for the flexibility opportunity to come to the fore. Partnerships between generators and off-takers are going to be key, as well as proactive advocacy to ensure the right technologies can be developed and markets can support the flexibility needs of consumers. The oil and gas industry has the financial muscle, political clout and experience to take the lead.
Moving into flexibility markets today makes a lot of sense because this is still largely virgin territory, giving early players a significant first-mover advantage. And it is doubly smart because flexibility markets are set to deliver returns for the foreseeable future—and not just as long as it takes to decarbonise today’s energy system.
The digest: this month’s key headlines
- US Democrats move to pump billions of dollars into the fight against climate change through the Inflation Reduction Act of 2022, the largest such investment to date.
- The UK celebrates its biggest-ever renewables support mechanism auction after securing almost 11 GW of capacity in its fourth Contracts for Difference round.
- Shell and ExxonMobil partner with Chinese firms on China’s first large-scale carbon capture and storage hub.
- Wind turbine maker Vestas launches world’s first hydrogen-powered offshore service vessel.
- European governments act to save ailing utilities #1: France looks to renationalise EDF.
- European governments act to save ailing utilities #2: Germany bails out Uniper.