Energy Transition

The ‘energy transition’ is the pathway being taken to transform energy use, shifting from fossil-based to zero carbon sources. The aim is for this to be achieved globally, during the second half of this century.

More generally, it refers to the global energy sector’s shift from fossil-based systems of energy production and consumption (including coal, oil and gas) to renewable energy sources (wind, solar, hydro, bio, marine, etc.). It also encompasses new and developing storage technologies such as large-scale batteries and hydrogen. The increasing penetration of renewable energy into the energy supply mix, the onset of electrification and improvements in energy storage are all key drivers of the energy transition, but a key component of the process is providing stability of energy supply during the transition. This brings with it, a continuing focus on progressive ‘decarbonisation’ on a global scale via the reduction of energy related CO₂ emissions.

The primary and earliest objective is ‘Net Zero’ by 2050 and this target has wide international, national and political support because of the importance of the problem it is seeking to mitigate. But while global companies have an important part to play, it is policy makers which must take the leading role and set the right frameworks, to foster innovation and investments, for this sustainable energy future. Three major issues must be balanced – economics, environment and society. It is effective and well-planned policies which will create the huge and beneficial opportunities within the energy transition domain. To date, regulation and commitment to decarbonization might be considered to be mixed, but there has been an acceleration of policies to incentivise investment needed in carbon capture and storage and the energy transition will continue to increase in importance as investors prioritize environmental, social and governance (ESG) factors.

Energy Transition Risk

The energy transition is one of the most complex challenges facing industrialised societies today, requiring widespread social and technological changes over several decades. There are important factors to be addressed and risks to be overcome. In the UK, detailed plans for achieving a Net Zero emissions economy by 2050 have been developed by several government bodies, including the Climate Change Committee, but there is still much uncertainty about the actual path of decarbonisation that will be followed, arising from four factors:

  • The sheer size of the energy system, which includes the billions of pieces of equipment in use in society, the miles of energy infrastructure networks connecting supply to demand such as the national electricity and gas grids, and the transportation of different types of solid, liquid and gaseous fuels (including imports and exports).
  • The need to transform a system that is essential for everyday life, while simultaneously ensuring that it continues to provide energy reliably and affordably.
  • The likely success of future but not fully developed technologies.
  • The availability of investment to meet plans.

Energy transition risk is often viewed as a long-term risk, the impacts of which will not be felt for decades to come. However, this is a simplistic view because while completion of transition might take decades, the increased uncertainty around the transition will impact energy markets on a much shorter time scale than the transition itself, thus lessening the ability to finance future transition activity. For example:

  • Uncertainties associated with energy transition have already started to alter the risk preferences of investors in fossil fuel projects.
  • Investors are demanding a much higher hurdle rate in order to invest in long cycle oil and coal projects.

Energy Transition Risk Assessment

We believe that long term successful implementation of energy transition will require effective risk management deploying the full range of the portfolio of methods from identification, evaluation and assessment to decision-making, and that such approaches developed in other sectors will be applicable, but need to be made specific. It is the diversity of risks which must be assessed that creates the complexity. At RMRI, we have a deep understanding of such methods from experience garnered over many years and across many industries. We have developed innovative methods and models for clients where issues lay outside of standard assessment approaches. At RMRI, we believe that there is a generic and consistent definition of risk which guides all risk-decisions; it is that ‘risk is capital staked under conditions of uncertainty, capital being multi-variate’. Thus, risk management is about seeking rational returns while minimising the hazardous outcomes. RMRI offer a wide range of services such as:

  • QRA as an input to decisions
  • Concept Assessment
  • Scenario planning
  • Suitability Assessments
  • Economic Risk Assessments
  • ALARP ‘goal setting’ demonstrations
  • Bayesian analysis
  • Combined Operations Thorough Reviews

For further information about RMRI or how we can help you manage your risks, please contact us.