RETHINKING ENERGY INFRASTRUCTURE AND MARKETS
Roland Berger's global expertise and knowledge of markets helps players chart a clear strategic path
A changing energy landscape
Some 194 countries around the world have signed up to the Paris Agreement to date, committing themselves to cutting emissions and adapting to the impacts of climate change. To achieve these targets, they have already increased both the share of renewable energy and the share of energy carriers such as electricity and hydrogen in the energy mix, and will continue to do so in the future.
But renewable energy differs significantly from conventional energy, and has different requirements in terms of infrastructure. Often it is intermittent in nature, dependent on the weather, time of day or season. It may require a shorter distance between generation and consumption centers, or rely on local generation rather than centralized. Changes in the energy mix can have a radical impact, necessitating adaptation to the transmission needs of offshore and onshore renewables, the increased electrification of transportation or the expansion of microgrids. And with those developments often come radical changes in market design.
Challenges and opportunities
The changing energy landscape creates both challenges and opportunities for companies. In particular, international power markets are becoming further intertwined as new interconnector capacity is built between different countries for the transmission of offshore wind power, additional onshore HVDC grids are constructed to deliver power directly to the point of consumption, and redispatch measures and costs for control energy increase in response to volatile feed-in volumes and deviations from planned power schedules. It is highly likely that future regulation will also favor further consolidation of grid areas or control zones.
In tandem with these developments, local autonomous markets or microgrids are emerging, integrating decentralized power generation and consumption. If the Internet of Things or artificial intelligence are used for control and storage in order to achieve physical balancing, these sub-markets could become fully autonomous, challenging current business models.
Natural gas, whether transported via pipeline or as LNG (liquified natural gas), will likely be the last fossil fuel to go in the global energy transition. Existing reservoirs will be exploited to their economic maximum at the end of the fossil age, and more new transcontinental gas projects will emerge. Meanwhile, some oil and gas pipelines will be used less and less as the process of decarbonization expands and the need for fossil fuels in transportation declines. Hydrogen, on the other hand, is likely to become a major energy carrier and investors will have to decide whether to build new infrastructure for its transportation and distribution or partially convert existing facilities.
These changes will have a knock-on effect on pricing. The energy price mechanism currently used by power exchanges will of necessity transform: As the share of renewables grows, so the "merit order" model for setting the price of electricity becomes defunct (the variable cost of renewables is close to zero). In its place comes "capacity pricing", which will grow in relevance over time. New fuels such as hydrogen have not yet become a commodity and do not yet have a market price, but this is only a matter of time.
Impact on business
The pace of the transformation leaves many energy players playing a game of constant catch-up. Clearly, they need to rethink their strategy in a wide range of areas, from adjusting their approach to risk and dealing with new regulation to adapting their generation and transmission infrastructure and replacing outdated business models. For example, the new energy landscape and increasing decarbonization are forcing them to rethink how they manage risk and price their products. They must adapt both their operating and business models as ancillary services grow more important and complex, due to the intermittent nature of renewable energy sources. In many cases they must try to secure public funding, at least during the transition phase, to finance the new energy infrastructure that is needed in order to utilize renewable power generation to the full. Charting a clear path through the ever-changing landscape is no simple task.
Roland Berger offers a range of consulting services that help energy players safely through the strategic labyrinth. Our expertise in orchestrating major capital projects helps our clients around the world build new energy infrastructure, deal with regulation, procurement, construction and maintenance, and develop effective pricing and commercial strategies. We assist clients with infrastructure projects at all stages of maturity, from project initiation, planning and de-risking right through to implementation, operation and decommissioning. We can also offer a strategic lifeline to companies whose projects are in trouble, helping get them back on track, on schedule and on budget.
On behalf of a Transmission System Operator (TSO) we analyzed potential synergies in the development of offshore wind farms and their connection to the grid via a transnational collaboration in the North Sea region. Our contribution included identifying concrete ideas for projects in four regional clusters and assessing the efficiency from a commercial perspective. Building on this, we then developed action plans for each cluster for those involved in the projects, and helped manage the various stakeholders.
We helped a country in Asia identify the required modernizations and upgrades to gas infrastructure, on the basis of detailed forecasts for regional gas production, imports, exports and consumption. As part of the project, we suggested necessary reforms to the gas sector, drawing on our assessment of the current political and regulatory framework. We also calculated potential gas transmission tariffs reflecting the operating and investment costs for a number of different scenarios.
Working closely with a major North American player in the energy industry, we performed an international benchmarking of hydrogen-related policies and financial instruments available in North America. Our work involved analyzing key success factors for setting up ecosystems around hydrogen – or "hydrogen valleys" – and assessing solutions along the entire value chain from both a technological and business perspective. We also calculated the approximate size of green hydrogen markets for stationary applications (green chemistry, steelmaking, oil refining) and mobility applications (fuel cells, e-fuels). We then helped the client develop and formulate a robust hydrogen strategy.