Five 2022 Predictions for energy and utilities

As we emerge from the pandemic, climate change and energy transition agendas are at a critical juncture. Knee-jerk reactions to short term crises will exacerbate our greatest challenges further. But neither can they be put off for a later time. To hit the right path, galvanize the transition, and manage the climate emergency, the sector must coordinate, innovate, and collaborate across all levels. In 2022, we’re going to see leaders around the world begin to hit their stride.

Alongside Capgemini’s annual analysis from the World Energy Market Observatory, our experts James Forrest, Peter King and Philippe Vié explore five key predictions for the energy and utilities sector in 2022.

High energy prices endanger the climate change agenda

Market uncertainty caused by the COVID-19 pandemic and the global energy crisis is set to carry long into 2022. Energy prices will keep rising as supply constraints, political tensions and post-pandemic economic recovery continue. There is no guarantee that the security of supply – which remained strong throughout the pandemic – will continue in 2022.

Expect governments to take action. As we have seen in the UK and elsewhere in Europe, these are times when governments tend to intervene, both to support suppliers and to ensure does not falter. Political tensions are rising globally at local and international levels, which could hamper efforts to review energy market mechanisms. But the bystander approach is untenable when the challenge is everybody’s problem. If the transition is going to be a hallmark of this decade, it should be protected this year.

Global energy markets face another perfect storm as outsiders capitalize

Faltering energy companies will be at the mercy of increased M&A activity from larger companies who are taking the long view of energy market profitability, looking beyond today’s unfavorable conditions to capitalize on cheap deals. This process of consolidation will enable financially secure players to adapt faster in the energy transition. We can hope that this will lead to greater collaboration between market players.

We can also expect to see continued market disruption from capital-rich outsiders like Shell and Mitsubishi. Last year’s activities herald an era of diversification in the sector and consumers may be surprised by . This increased competition will likely drive further innovation.

A step-change in adaptation and risk monitoring

The chances of vastly improved climate change mitigation and adaptation solutions in 2022 remain slim. While there’s been more awareness about risk in the years since the Fukushima nuclear disaster, many firms still don’t know how to properly measure or quantify risk. This is not only a barrier to action but presents an outright danger to people and the environment in a year where more natural disasters are almost certain. We can expect to see more investment in quantifying operational risk and monitoring as the industry works to become more reactive and predictive. This is nowhere more apparent than in the electricity and water sectors which in the past year have seen major high-profile climate-related events. Whether efforts will be adequate is another question.

Expect to see fixes for challenges at a local level, with firms adapting and improving physical infrastructure. Take for instance, the recent failure of Texas’ wind turbines, which presents a clear need to improve design and interconnection across the board and tailor it to the demands of its geography. As we increasingly rely on and invest in solar and wind technologies, inherent complexities and risks are becoming clearer. We can expect to see a combination of greater innovation for challenges, such as soil erosion creating dust at solar farms, and greater urgency at a basic level. Quick and easy physical adaptations, like concrete bunds at energy facilities to prevent flooding from disrupting supply, should be rolled out in 2022.

Bringing hydrogen and nuclear into the fold

Hydrogen has a key role in the future, and yet we’re far away from global ambitions if it is to take a key role in the Energy Transition. The sector can be expected to focus on making green hydrogen cheaper and improving efficiency, which will provide another option on clean dispatchable generation. Clean energy solutions like solar and wind, which are now at the right price point, will be deployed at a greater pace in 2022. Whether green hydrogen will in fact accelerate is harder to say. If funding becomes more concrete and availability of low carbon generation is reliable, the odds look bright.

We can also expect development of regional solutions and industrial hubs, with the help of interconnectors, to diversify energy and maximize the potential output of specific areas. However, reliability or affordability remain obstacles. If companies deliver products at the right price point and ensure the infrastructure exists to host them, we’re going to see significant progress in this area.

The case for investment in nuclear will be more convincingly made in 2022. Nuclear offers low carbon energy at a known price, insulated from global energy trends. We can expect governments to start to make direct commitments to nuclear (both large and small plants) as one way of demonstrating the viability of their Net Zero plans.

The year of truth for COP26 commitments

Following COP26, the question is whether nations will make good on their 2030 commitments to make the 1.5-degree target feasible, and we expect many key players, including the EU, to accelerate their transition agenda and legislation. Less predictable is whether the US, India and China will escalate climate funding and 2030 plans too. The US in particular finds itself at a crossroads, with the far-reaching Build Back Better Act liable to go either way. What we can say is that industry will be watching. We can also expect businesses to ramp up their lobbying efforts to overcome the administrative and regulatory hurdles currently holding them back from an affordable and accessible transition.

In view of COP27, we are going to see more and more political groups drawing the parallel between the levels of crisis financing we’ve witnessed over the pandemic and the dedication of increased funding to the climate crisis – an existential threat, with far greater financial and health consequences than the pandemic. We can reasonably expect funding to accelerate. Keep your eye on developing nations as capital is unlocked, with the goal of helping them to adapt to climate change and stimulating investment in clean energy production. As cliché as it sounds, it really is now or never.

Authors

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James Forrest

EVP: Global Industry Leader Energy and Utilities at Capgemini

Philippe Vie

 Group Leader Energy and Utilities at Capgemini

Peter King

Global Energy and Utilities Lead Capgemini Invent, VP at Capgemini Invent