Demand

After many years of flat energy demand, especially in developed economies, power consumption is expected to triple globally by 2050 as electrification and living standards grow [1]. EV penetration will see demand growth accelerate by 11% per year by the end of the decade [2], 

By 2050, electricity could account for 50% of the energy mix [3]. To achieve this, total electricity generation increases over two‐and‐a‐half‐times between today and 2050 [4]. Most of that growth will come from new energy sources such as solar, wind and potentially nuclear. This will also require increases in transmission and distribution capacity. 

Natural gas will remain an important part of the energy mix, driven by difficult to decarbonise building heating,  and will increase by 0.9% from 2020 to 2035. From 2035 to 2050, gas demand will decline by 0.4% [5]. Hydrogen may become an alternative gas-based energy source. 

Affordability has also become a key driver for demand. Governments across Europe have had to intervene to cap or subsidise retail prices in the wake of the Russian invasion of Ukraine. 

Reducing demand through energy efficiency is also important to total demand. It is also the easiest way to support the three pillars of many government's energy policy: security, affordability and sustainability.

Security

The energy industry is particularly vulnerable to geopolitical, climate and weather related events.

The Russia's invasion of Ukraine invasion has made a tenuous situation much worse for energy markets, particularly in Europe. Russia previously accounted for approximately 40% of Europe’s natural gas imports [1]. The imperative for power utility companies, working in concert with governments, is to mitigate the potential disruption of oil and gas supplies from Russia. The fallout from Ukraine is only the latest example of how concerns over energy security alter the direction of policy, with impacts on supply and demand in many regions. The 1979 energy crisis, which occurred in the wake of the Iranian Revolution, kick-started the global interest in renewable energy.

The biggest threat to the resilience of the electric grid comes from weather events such as heat, ice, flooding, and extreme storms. Climate change is causing warming across the globe and with it more extreme weather event. All of the UK's ten warmest years on record have occurred since 2002. Heatwaves are now 30 times more likely to happen due to climate change [2]. UK winters are projected to become warmer and wetter on average. Heavy rainfall is also more likely. Since 1998, the UK has seen six of the ten wettest years on record. The winter storms in 2015 were at least 40% more likely because of climate change [3]. The examples keep coming: In 2017, more than 3.6 gigawatts of power in the United States was at risk during Hurricane Harvey. One year later, Italy’s Storm Vaia caused more than €2.8 billion in economic losses. And in February 2020, during Germany’s Storm Sabine (“Ciara” to the rest of the world), wind power made up 60% of the country’s electricity generation; during the storm, strong gusts of wind caused the wind turbines to switch off, creating considerable stress on grid stability [4].

  Together, these factors will ensure that wholesale energy prices remain high and markets tight, and will mean that geopolitical issues and government policies will drive the transition of the power utilities to increase energy security through a shift to renewables and grid resilience. 

Profitability

Managing the triple objectives of decarbonizing supply, increasing energy security and supporting demand growth poses a significant challenge to profitability, especially with continuing regulatory focus on price controls. 

Market volatility has already seen many smaller retail utilities collapse whilst the power generators have made excess profits. This imbalance has required large-scale government intervention to prevent further failures and untenable retail pricing. The UK government has also introduced windfall taxes on energy companies excess profits. It is likely that governments will need to relook at the market structure in order to meet the challenge of the increasingly uncertain world. 

Utilities companies are likely to have to manage two strategies:

- Maximising returns from the Regulated Asset Base (RAB) whilst meeting the demands of energy transition and resiliance

- Investing in low-carbon ventures, including renewable power generation, carbon capture and storage, green hydrogen, and new forms of electric services such as EVs.  Many of these have uncertain business models. Oil & Gas companies are also investing into similar low-carbon ventures and these moves are blurring the business boundaries, increasing competition.