Who’s winning the race to a new energy world?

All regions are hurtling towards a new energy world – but some will get there sooner than others. Examining the impact of four forces of change can help unravel the regional differences of the energy transition.

In 2018, EY published industry-first research that examined how quickly the world’s energy markets were progressing towards three tipping points: when self-generation reaches cost parity with grid-delivered electricity; when electric vehicles (EVs) achieve cost parity with internal combustion engine vehicles; and when the cost of merely delivering electricity via the grid will exceed that of self-generated, stored energy.

However, our latest analysis of the energy transition in seven major markets shows that four key forces – better, cheaper technology; more ambitious clean energy targets; distributed generation momentum; and stakeholder action – are progressing so fast that the first tipping point (grid parity) will arrive up to two years earlier than expected in some regions.

The impact of the forces of the energy transition differ across regions

An accelerated countdown to change means energy companies have even less time to prepare for a fundamentally different world – where consumers produce their own energy, businesses self-generate or procure green energy direct, EVs dominate the roads, and even the cost of transporting electricity via a grid exceeds the cost of generating and storing it onsite.

But while all markets are moving towards the energy transition at a faster speed than previously thought, some are clear leaders while for others, timings will be slower. Examining major energy markets shows that some drivers are more dominant in certain markets, where outcomes will be shaped by local circumstances, maturity and dynamics.

Some regions will be characterized by high economic growth, income and technology implementation, such as distributed generation and EVs. Some will be exposed to extreme weather, support mainly rural communities, or lack basic infrastructure and access to energy. Others, with legacy assets like nuclear or coal, will dictate the pace and direction of change. Whilst those with good gas resources or access to coastal areas, may benefit from offshore wind or interconnections with neighboring markets.

The renewable energy sector of Europe is perhaps the worlds’ most advanced. Technology plays a major role – adoption rates of distributed energy resources are high and the region is a hub for energy technology innovation from both major utilities and smaller niche companies. At the end of April, more than 75% of generation in Germany came from renewable sources. And in the UK, clean energy has overtaken fossil fuels, as the push to decarbonize the energy system accelerates. But arguably, supportive energy policy and strong regulation are the biggest factors behind Europe reaching grid parity as early as 2022. Read more.

Oceania is also an advanced market. In fact, tipping point one (grid parity), will hit Oceania first, in 2021, largely due to Australia’s world-leading rates of rooftop solar PV adoption, and a recent surge of utility-scale solar projects. Government incentives have helped amplify consumers’ acceleration of the use of renewable, though recent policy uncertainty may see progress stall if it deters future investment. Read more.

The US is a patchwork of several different energy markets. In contrast to Europe, policy is less of a driver, at least at a government level where support for renewables has been wound back. Many states and cities have put their own clean energy plans in place – across the US, over 90 cities and more than ten counties have already adopted ambitious 100% clean energy goals, and almost a dozen states have or are considering committing to 100% renewable or clean energy. But perhaps unsurprisingly, the US energy transition is largely consumer driven. Appetite for self-generation, from households and corporates alike, are accelerating change and helping shape a strong culture of energy technology innovation. And at the same time, technological innovation and cost efficiencies are improving the competitive edge of wind and solar. Read more.

In the world’s emerging energy markets, the switch to cleaner sources of energy is driven by surging economic growth. The need for more power and energy independence is behind the ambitious energy policies of India, where governments are working to meet the country’s growing electricity demand more sustainably. Read more.

China has also put in place aggressive renewable energy policies to meet demand while reducing pollution. But Chinese leaders are recognizing the need to move towards a market-led economy, which will further boost the innovation that is making them a world leader in clean energy. Read more.

Across the Gulf Cooperation Council (GCC), electricity consumption is rising driven by population growth and urbanization, rising income levels, industrialization, and low electricity prices. Clean energy is increasingly prioritized in a region which has abundant solar resources. But fiscal challenges have meant that governments are no longer able to support the provision of cheap power. Many countries have recently increased electricity prices and are also accelerating their price reform plans, with the aim of liberalizing prices in the short term. While these programs will aim to reduce the fiscal burden on governments, they will also help to reduce demand growth. Read more.

In Latin America, energy policy is focused on creating a diverse mix of generation sources, as many countries move away from hydropower, which is expensive to sustain in El Nino conditions. But consumer appetite to embrace increasingly cost-effective solar is also a factor. For example, Mexico’s solar PV adoption is taking off faster than forecasted. Read more.

Energy companies in all regions must pick up the pace

Across all regions, the changing energy sector is encouraging new competition, which will in turn, further boost innovation. Technology providers, digital giants, auto manufacturers, retailers, aggregators and intermediaries are vying for a share of energy customers’ expenditure - and are well placed to scale up investment and stake claims across the electricity value chain.

Already, we see oil and gas companies diversifying into EVs and investing in infrastructure, renewables and advanced battery technologies. Their arrival is prompting introspection from traditional providers, who are assessing their future relevance to consumers who are digitally connected and, increasingly, self-generators of energy. They are considering what they can do differently to retain customers whilst also:

• Running a reliable, efficient and safe grid, at the same time as maximizing returns on asset investments, as traditional funding sources erode due to flat or declining sales.
• Accommodating rising volumes of intermittent distributed energy resources into a grid that was originally built to enable one-way power flows from centralized generation.
• Delivering greater value to customers whose expectations, influenced by experiences in other sectors, are on the rise.

The presence of new players only amplifies the need for the world’s energy companies, regardless of their operating market, to take bolder, faster action:

• Generators, networks, and retailers must shift operating models – transforming into businesses fit for a new electrified, decarbonized energy world. A flexible mindset will be needed to adapt quickly to changing market dynamics and a shifting balance of power. And the energy industry as a whole, must work more closely with regulators to ensure regulation keeps pace with change.
• Financing models must evolve to incentivize new energy solutions.
• Collaboration across an expanding energy ecosystem – of multiple industries, governments and communities – will be critical.

As the countdown speeds up, we will continue to see regional differences in the pace of progress. But ultimately, creating a cleaner energy sector is a global challenge – and a global effort is required to fulfill the potential of the energy transition.

Read more about the energy sector’s accelerated countdown to change.

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For more information on the transformation of the energy sector, visit NextWave Energy and join the conversation using @EY_PowerUtility / #EYEnergy.