With the world heading for a future of low-carbon economic prosperity, one thing is certain: The energy industry will have to commit to growing the business and investing in the future. What is much less certain, however, is how this will pan out in practice. For the new report The Future of Power is Growth, Deloitte’s industry experts have teamed up with Deloitte strategy specialists to develop four future scenarios that give utility executives a useful framework for strategic decision-making. Remarkably, the EU is only able to achieve its goal of climate neutrality by 2050 in two out of these four scenarios.
The European power utility sector is facing fundamental change. In order to realise the EU’s ambitious climate goals, the sector will have to make massive investments in the transition to renewables – a major departure from the asset-light strategies that have dominated the industry over the last decade. A return to traditional asset-heavy utilities is vital to achieve the energy generators’ decarbonisation targets, but the sheer scale of the investment required also poses major strategic challenges. Deloitte experts have created four scenarios that provide a robust decision framework and help the energy industry navigate the path to climate neutrality.
Predicting the future is by definition tricky – even in a sector as highly regulated as the energy industry – and there are a host of intersecting interests, policies and trends that further complicate the picture. At the same time, business leaders need to form educated opinions about these trends and prepare action plans for a range of plausible futures. That’s where Deloitte’s scenario methodology comes in , acting as a useful guide for this type of strategic planning. It synthesises distinct future narratives based on prevalent empirical trends, potential developments and possible game-changing events. First, we analyse key trends of the European power generation landscape, including the cost-efficiency of renewables, the prevalence of externality taxes, investment in network infrastructure, the level of political coordination and ambition, electrification of end-use demands and the regulatory push for energy transition, in addition to market, technology and macroeconomic factors. After our assessment of each of these drivers in terms of their criticality and uncertainty, we establish two axes that delineate the most relevant dimensions of the future state. For the power utilities, these are:
In the next step, we assess the four scenarios created by combining the axes in a two-by-two matrix using Deloitte’s proprietary market model as a quantification tool (Deloitte European Electricity Model, DEEM). The four scenarios for the energy industry are as follows:
(Degree of electrification: all-encompassing, determination and implementation of energy policies: high, unified)
The first scenario is one in which collaboration and investment at the European level achieves rapid decarbonisation. Based on the assumption that the EU’s COVID-19 recovery fund has a positive economic effect, the stable growth in this narrative provides the necessary conditions for an EU-wide energy transition to carbon neutrality. Additional EU stimulus investments facilitate electrification and sector coupling. New technologies and smart infrastructure drive down costs for renewables, which increases the rate of adoption overall, as well as for green hydrogen production. Coordination within the international power grid has been optimised, due in part to a higher degree of demand-side flexibility resulting from political consensus and customer involvement. By 2050, the EU will meet its climate goals.
(Degree of electrification: significant, determination and implementation of energy policies: high, unified)
In this future world, global tensions and uncertainty prompt the EU to make energy security and self-sufficiency a priority. This means that primary energy carriers will play a competitive role in the energy mix next to renewables. The bulk of technology investment goes to hydrogen, nuclear power, biofuels, synthetic fuels, carbon capture and energy efficiency. Advancements in power grid efficiency and a high degree of consumer involvement enable the EU to achieve its climate goals by 2050, despite lower electrification rates than in scenario 1.
(Degree of electrification: significant, determination and implementation of energy policies: low, reactive, unaligned)
This scenario paints a decidedly more somber picture of political and economic crisis. Reacting to external and internal pressure in the COVID-19 aftermath, countries are increasingly prioritising their own national interests and abandoning the EU Green Deal. This slows the energy transition to low-carbon, with supply chains retaining much of their fossil fuel base and supplementing with imports. Carbon Capture and Storage (CCS) technologies help to reduce emissions somewhat. However, fragmentation at the international level and a lack of unified European initiatives result in a failure to meet the 2050 climate goals.
(Degree of electrification: all-encompassing, determination and implementation of energy policies: low, reactive, unaligned)
While the economic crisis in scenario 4 results in an “every-country-for-itself” dynamic within the EU, national decarbonisation initiatives still achieve a high level of electrification and successful sector decoupling. Domestic renewable champions play a central role, for instance by introducing new storage technologies. On the other hand, customer participation is low, and a lack of political alignment hinders market integration and slows efficiency gains. As a result, the EU misses its 2050 climate goals by a slight margin.
The four scenarios may sound concise and well-defined, but they require additional modelling effort to describe in detail the precise nature of possible developments between now and 2050. For instance, scenario 1 (“Happy EU-lectrons”) is based on cumulative investments of a whopping 4 trillion euros in renewables by that time, bringing its share in net power generation to 90 per cent. However, from 2030 onward, investments will fall again in relative terms as the projected cost of renewable technology comes down. We also have to consider regional differences within Europe, for example in Central Europe, where investments vary significantly depending on the scenario. Deloitte’s unique DEEM quantification model provides a toolset for more granular insights and comparisons between various scenario outcomes. Find out more about this and additional practical tips for business leaders in the comprehensive report The Future of Power is Growth.