2023年全球能源和自然资源报告（英）--贝恩VIP专享VIP免费

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Energy and Natural Resources Report 2023

Acknowledgments

The leadership team of Bain & Company’s Global Energy & Natural Resources (ENR) practice prepared

this report, with special direction from Grant Dougans, partner, and Clementien Valk-Fabels, practice

senior manager.

The authors would like to thank Bain Partners Carlos Cruz, François Faelli, Peter Guarraia, Karen Harris,

Wren Kabir, Dave Rennard, Tony Walker, and Stefan Wörner; ENR Practice Vice President Peter Meijer;

Social Impact Practice Vice President Martha Moreau; Expert Partner Cate Hight; and Associate

Partner Adam Frey for their contributions to this work. Thanks also to Nick Baker, Sophie Ladousse,

Siddhi Desai, Hind Katkhuda, Sonal Tripathy, Khushboo Sultan, Ashwin Sharma, Sreenivash S,

Mukul Bhardwaj, Ethan Dobbs, Rushan Kee, Dhairya Shrivastava, Hannah Bingley, Jose Antonio

Majluf Suares, Alex Yuan, Bella Vandenberg, Nicole Edwards, Lina Jasiulionyte, and Anna Civilini,

as well as Jeﬀ Bauter Engel, David Sims, and the editorial team for their assistance.

Energy and Natural Resources Report 2023

Contents

Data-Rich Perspectives ..................................................3

State of the Transition 2023: Global Energy and Natural Resource

Executive Perspectives ..................................................4

The Dual Challenge of the Energy Transition Is Urgent and Unprecedented ......20

The Energy Transition: Fragmented, Disorderly, and Ripe with Opportunity ......29

Full-Potential Agenda ...................................................39

Willing but Not Able? The Energy Transition Has a Scaling Problem............ 40

Four Imperatives for Building Resilience in Energy and Natural Resources .........49

The Energy Transition’s Other Big Puzzle: Making the Math Work...............55

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EnergyandNaturalResourcesReport2023AcknowledgmentsTheleadershipteamofBain&Company’sGlobalEnergy&NaturalResources(ENR)practicepreparedthisreport,withspecialdirectionfromGrantDougans,partner,andClementienValk-Fabels,practiceseniormanager.TheauthorswouldliketothankBainPartnersCarlosCruz,FrançoisFaelli,PeterGuarraia,KarenHarris,WrenKabir,DaveRennard,TonyWalker,andStefanWörner;ENRPracticeVicePresidentPeterMeijer;SocialImpactPracticeVicePresidentMarthaMoreau;ExpertPartnerCateHight;andAssociatePartnerAdamFreyfortheircontributionstothiswork.ThanksalsotoNickBaker,SophieLadousse,SiddhiDesai,HindKatkhuda,SonalTripathy,KhushbooSultan,AshwinSharma,SreenivashS,MukulBhardwaj,EthanDobbs,RushanKee,DhairyaShrivastava,HannahBingley,JoseAntonioMajlufSuares,AlexYuan,BellaVandenberg,NicoleEdwards,LinaJasiulionyte,andAnnaCivilini,aswellasJeffBauterEngel,DavidSims,andtheeditorialteamfortheirassistance.Copyright©2023Bain&Company,Inc.Allrightsreserved.EnergyandNaturalResourcesReport2023ContentsData-RichPerspectives..................................................3StateoftheTransition2023:GlobalEnergyandNaturalResourceExecutivePerspectives..................................................4TheDualChallengeoftheEnergyTransitionIsUrgentandUnprecedented.....20TheEnergyTransition:Fragmented,Disorderly,andRipewithOpportunity.....29Full-PotentialAgenda..................................................39WillingbutNotAble?TheEnergyTransitionHasaScalingProblem............40FourImperativesforBuildingResilienceinEnergyandNaturalResources........49TheEnergyTransition’sOtherBigPuzzle:MakingtheMathWork..............551Data-RichPerspectivesStateoftheTransition2023:GlobalEnergyandNaturalResourceExecutivePerspectives..................................................4TheDualChallengeoftheEnergyTransitionIsUrgentandUnprecedented.....20TheEnergyTransition:Fragmented,Disorderly,andRipewithOpportunity.....29Data-RichPerspectivesStateoftheTransition2023:GlobalEnergyandNaturalResourceExecutivePerspectivesBain’sthirdannualsurveyontheenergytransitionfindsexecutivesincreasinginvestmentsinlow-carbonbusinesses,butskepticalofconsumers’willingnesstopaymore.ByGrantDougans,NeelamPhadke,AlasdairRobbie,andJoeScaliseAtaGlanceExecutivesbelievetheircompaniesareoutperformingtherestoftheworldinreducingemissions,butexpecttherateofdecarbonizationtoslowdownoverthenextfewyears.Companiesexpecttodeployaboutaquarteroftheircapitalonnewgrowthbusinessesin2023,manyofthesefocusingonlow-carbontechnologies.Respondentssaytheyaren’tconcernedaboutaccessingcapitalforlow-carbonbusinesses,butneedtoensureadequatereturnsonthoseinvestments.Talentshortagesareimpedinggrowth,especiallyfortechnicalexperts,aswellasfrontlineworkersinNorthAmerica.4EnergyandNaturalResourcesReport2023Executivesinthefieldsofoilandgas,utilities,chemicals,mining,andagribusinessareonthefrontlinesoftheenergyandnaturalresource(ENR)transition.Whileconcernsaboutclimatechangeandextremeweathergrow,andcustomersandshareholderscalloutforrapiddecarbonization,theseexecutivesaretaskedwithchangingthewaytheworldproducesandusesenergy,food,andmanycriticalmaterials—allwhilekeepingtheirbusinessesviable.AtBain,weworkcloselyeverydaywithexecutivesintheseindustriesacrosstheglobe.Ourannualsurveyseekstoassesstheiropinionsandattitudesabouttheprogressoftheenergyandnaturalresourcetransition,howtheircompaniesaremanagingthroughthesechanges,andwhatbarrierstheyseeahead.Thisyear,wefoundexecutivesexpectingaslowdownintherateofdecarbonizationintheshortterm(by2030),thoughtheirlong-termexpectationsremainlargelypositive.Our2022reportfoundexecutivesgrapplingwithincreasingcomplexityandadisorderlytransitionastheybalancedcarbon-reductioneffortswiththeeconomicrealitiesoftheirbusinesses.Intheyearsince,we’veseenthiscomplexityexacerbatedbygeopolitics,whichproducedimbalancesintheenergyecosystemandmayhavecontributedtoexecutives’beliefthatashort-termslowdownisathand.Executivesremainconfidentabouttheirownabilitiestomanagethroughthiscomplexitytoalower-carbonfuture,butarelessconfidentabouttheworldatlarge.Thesefindingscomeoutofourdiscussionswithclientsandoursurveyinearly2023ofmorethan600executivesacrosstheenergyandnaturalresourcesector.Aslastyear,wewantedtogetabetterideaoftheirviewsontheenergyandnaturalresourcetransition,newtechnologiesandinvestmentopportunities,andwheretheyseethegreatestchallengesfordecarbonization.Amongthemostinterestingfindings:•Mostexecutivesstillbelievetheirowncompaniesaredoingbetteronthepathtonetzerothantheworldasawhole,andaboutone-thirdbelievethey’redoingbetterthantheirpeers.•Companiesexpecttodeploy24%oftheircapitalonnewgrowthbusinessesin2023.NorthAmericaiscatchingupwithEurope.•Accesstocapitalfornewlow-carboninvestmentsisn’tamajorconstraint,butensuringareturnoninvestmentcertainlyis.Mostcustomersaren’twillingtopaymuchmoretosupportthesenewbusinessesatscale,socompanieswillneedgovernmentpolicysupporttoincentivizetheinvestment.•Renewables,artificialintelligence(AI)andotherdigitaltechnology,andenergystoragearethemostcriticaltechnologiesforthesectorthrough2030.ExecutivesintheMiddleEastarebullishonhydrogenandcarboncapture,butexecutivesinmostotherregionsexpectthesetechnologiestobecomemoreimportantonlyafter2030.•Talentshortagesareasignificantbarrier,especiallyforfrontlineworkersinNorthAmericaandtheMiddleEastandforengineersanddigitalexpertsinallsectors.5EnergyandNaturalResourcesReport2023GlobalperspectivesExecutivesanticipateaslowdownintherateofdecarbonizationoverthenextfewyears(seeFigure1).Butaslowdownisexpectedtobemodest,andtheirlong-termexpectationshaven’tchanged.Althougheffortstodecarbonizearestillprogressing,turmoilinenergymarketsresultedinmorecoalbeingburnedtomakeupforshortfallsinRussian-suppliednaturalgas.Severaltoldusthattheeventsof2022couldshiftthefocusofinvestmentsbacktowardaddressingscarcityandmakingenergyaffordableintheshortterm.However,geopoliticaleventsalsoacceleratedthedeploymentofcapitaltorenewablesascountriesandcompanieslooktobecomemoreself-sufficient.“Thesuccessofthepivottocleanenergytechnologieswillbedeterminedbytheextenttowhichpeopleseethebenefitswhileminimizingdisruptions—withfocusonaffordabilityandfairness.”—Newenergyexecutive,IndiaAveragedacrossoursurveyparticipants,2057remainstheconsensusdatewhentheworldcouldreachnet-zerocarbonemissions(seeFigure2).Asagroup,theyexpectemissionsreductionstoFigure1:EnergyandnaturalresourceexecutivesanticipateaslowdownintherateofreductionofcarbonemissionsoverthenextfewyearsExpectedchangeinglobalCO2eemissionsby2030–9.8%–12.1%2023survey2022surveyNotes:Bain’s2023ENRTransitionSurveyincludesanswersfrom608executivesfrommorethan200companiesacross46countries;58%oftherespondentswerevicepresidentorhigher(includingC-levelexecutivesandboardmembers),andthecombinedmarketcapitalofthecompaniescoveredisabout$4.5trillionSources:BainENRTransitionSurvey2022(n=1,037);BainENRTransitionSurvey2023(n=608)6EnergyandNaturalResourcesReport2023broadlytrackcurrentpledgesthrough2030,thenacceleratetoachievenetzeroby2057.Forthistohappen,alotwouldhavetochangeafter2030.Forexample,theInternationalEnergyAgencyestimatesthatfortheworldtoreachnetzeroby2050,annualinvestmentsincleanenergywouldneedtoincreaseto$4.6trillionby2030fromthe2022levelofabout$1.6trillion.Allthewhile,thecompaniesimplementingtheseinvestmentsmustalsoensurethattheseprojectsareeconomicallyviableandcanbeexecutedgivenphysicalconstraints(forexample,availabilityofmaterials,labor,supplychain).Aboutone-thirdofexecutivesbelievetheirowncompaniesarefurtheralongthepathtonetzerothantheirpeers,andtwo-thirdsbelievethey’removingfasterthantheworldasawhole.36%67%believethey’lldecarbonizeexpecttodecarbonizefasterfasterthanpeersthantheworldasawholeSource:BainENRTransitionSurvey2023(n=608)ReductionofScope1and2emissionsremainsthetopESGpriorityforenergyandnaturalresourcecompanies(88%rankemissionsreductionintheirtopthreeissues).ENRexecutivesarealsothinkingabouttheirimpactonlocalcommunities,apointthatremainsatop-threeissueinallregionsotherthanEurope,whereitranksbelowScope3emissionsandcircularity(seeFigure3).Interestincircularityisalsogrowing.Inthechemicalssector,it’satop-twopriority,andwe’veseenan8-to10-percentage-pointincreaseininterestinagribusiness,mining,andoilandgas,whereroughlyoneinthreeexecutivesconsideritatop-threepriority.Fouroutoffiveexecutivesconsidertheabilitytocreateacceptablereturnsonprojectsamainbarriertodecarbonizationoftheenergysystem.Theirconcernsarebasedoncustomers’unwillingnesstopay—notuniversal,butenoughtomakeithardtoscalelow-carbonbusinesses.Sotheylooktogovernmentpolicyandregulatorysupporttohelpbridgethegap.Fewerthan20%expressedsignificantconcernsaboutaccessingcapital(seeFigure4).7EnergyandNaturalResourcesReport2023Figure2:Onaverage,executivesexpectemissionsreductionstoreflectcurrentpledgesuntil2030,thenacceleratetoachievenetzeroby2057Globalgreenhousegasemissions(GtCO2)–9.8%by203060Existingpoliciesandactions:temperaturesriseabout2.7°C4020Pledgesandtargets:temperaturesriseabout2.1°C0Bain’s2023ENRTransitionSurvey:netzeroby205720102030405060ActualemissionsProjectionsifsurveyexpectationsaremetNote:BaselineestimatefromClimateActionTrackerDecember2018updateSources:ClimateActionTracker,November2021;IEA;BainENRTransitionSurvey2023(n=608)Figure3:EmissionsreductionandtheimpactonlocalcommunitiesremaintopconcernsacrossENRindustriesUtilitiesOilandgasChemicalsAgribusinessMiningandminerals184%95%95%86%86%RankingbyScope1and2Scope1and2Scope1and2Scope1and2Scope1and2percentageemissionsreductionemissionsreductionemissionsreductionemissionsreductionemissionsreduction2ofexecs69%56%71%54%73%whoincludedScope3ImpactonlocalCircularitySupplychainImpactonlocaleachtopicemissionsreductioncommunitiestraceabilitycommunitiesintheirtopthreepriorities59%51%66%49%55%3ImpactonlocalScope3Scope3Scope3Scope3communitiesemissionsreductionemissionsreductionemissionsreductionemissionsreductionNotes:Scope1measuresgreenhousegasesdirectlyemittedbyanorganizationorbyactivitiesunderitscontrol;Scope2measuresindirectemissionsfromelectricityorotherpowerusedbyanorganization;Scope3measuresotherindirectemissionsrelatedtoanorganization,includingthoseresultingfromtheuseofitsproductsSource:BainENRTransitionSurvey2023(n=608)8EnergyandNaturalResourcesReport2023Figure4:Executivessaythegreatestobstaclestodecarbonizationarecustomers’unwillingnesstopayhigherpricesandthedifficultyofensuringadequatereturnsforinvestmentsPercentageofexecutiveswhoselectedeachbarrierintheirtopthree78%56%36%32%23%19%12%9%7%LimitedROI/LackofLackofSlowSupplyShortfallStakeholderLackofLackofcustomerpolicyandrequiredpermittingchainofcapitalchallengesorganizationallaborandwillingnessregulatorytechnologyandlegalconstraintstopaysupportprocessesexpertiseserviceprovidersSource:BainENRTransitionSurvey2023(n=608)“Transitionwillnotoccurifithasanegativeimpactoncompanies’economicbottomline.Companiescannottransitioniftheirbusinessesareatriskbydoingso.”—Miningandmineralsexecutive,LatinAmericaSlowpermittingisalsoamajorconcern,evenwherethepolicyenvironmentismoreaccommodating.MostNorthAmericanutilitiesexecutivesciteditasoneoftheirtopconcerns,althoughtheyalsoseepolicyasmuchlessofabarrierthandotheircounterpartsinEuropeandAsia(seeFigure5).InEurope,wheremorethanhalfofexecutivesfromtheutilitiesandminingsectorsciteslowpermittingasatopissue,theEuropeanUnionhasannouncedadraftregulationthataimstoreducepermittingtimesforlargeenergytransitionprojectstonomorethan12months.“Whileitcanbeaworthygoaltocutemissions,therewillbealargesocietalcostifwemovetooquicklyintheshorttermandleavepeopleatriskofdyingbecausetheycan’taffordtoheattheirhomes.”—Utilitiesexecutive,UnitedStates9EnergyandNaturalResourcesReport2023Figure5:NorthAmericanandEuropeanutilitiesexecutivesareconcernedaboutpermitting;executivesinAsia-Pacificseetechnologyasatopbarrier65%56%56%ofNorthAmericanutilitiesofEuropeanutilitiesofAsia-PacificutilitiesexecsconsiderpermittingexecsconsiderpermittingexecsconsidertechnologyatopbarrieratopbarrieratopbarrierSource:BainENRTransitionSurvey2023(n=608)Surprisingly,notmanyexecutivesidentifiedserviceproviders(e.g.,engineering,procurementandconstructioncontractors,aswellasmaintenancecompanies)asabottleneck.Only7%flaggeditasamajorproblem,possiblybecausemanydecarbonizationprojectsarestillatearlystageswithonlylimitedcapitaldeployedsofar.IntheAsia-Pacificregion,availabilityoftechnologyalsoshowsupasacriticalbarrier.“Thecomplicationsindevelopingeconomiesistherelianceonthecorebusinessesforprovisionoflaborandeconomicopportunitieswhichmaynotbereplicatedintheenergytransition.”—Chemicalsexecutive,AfricaOtherexecutivesexpressedconcernsaboutpricespikesiffossilfuelsaredefundedtooquicklyandenergysupplycannotmeetdemand.Somealsodescribedalackofunderstandingonthepartofpolicymakers,themedia,andthepublicabouttheinterconnectednessoftheenergysystem,andtheylooktogovernmentstohelpdeterminerealisticpathsandgoals.10EnergyandNaturalResourcesReport2023“Thereisabasiclackofunderstandingofhowafullydecarbonizedsystemmayworkandatwhichcost.Policymakersyearlyincreasedecarbonizationtargets,withoutanyrealitycheck.Top-downprocessesarepredictedtofailunlesstheyfindsupportfrompeople,especiallywhenthesetargetserodespendingpowerbyincreasingthecostofenergyandfuels.”—Utilitiesexecutive,EuropeProspectsforcorebusinessesEventsofthepastyearshownosignificanteffectonexecutives’beliefsaboutthedurabilityoftheircorebusinesses.Executivesinutilitiesandnewenergyaremostoptimistic,withnearlytwo-thirdsexpectingtheirbusinesstogrowrapidly,owingtocontinuedtailwindsfromelectrificationandlow-carbonenergyincreasinglyapartoftheircorebusiness.Thepercentageofoilandgasexecutivesanticipatingarapiddeclineoftheircorebusinessoverthenext10yearsfellto4%from8%thepreviousyear.But,aslastyear,abouthalfstillexpectsomedecline(seeFigure6).Figure6:OilandgasexecutivesarelesssanguineabouttheprospectsoftheircorebusinessthantheirpeersinotherENRindustriesShareofexecutiveswhothinkthat,overthenext10years,theircorebusinesswill...GrowrapidlySeesomedeclineDeclinerapidly64%48%14%30%24%37%9%19%14%Agribusiness4%MiningChemicalsandmineralsOilandgasUtilitiesandrenewablesNote:NorespondentsforagribusinessexpectadeclineSource:BainENRTransitionSurvey2023(n=608)11EnergyandNaturalResourcesReport2023Capitalforlow-carbonbusiness.ENRcompaniesplantoallocatemorecapitaltonew,low-carbongrowthareas.Acrosssectors,theyplantoallocateabout24%oftheircapitaltonewgrowthbusinessesin2023,upfrom16%in2020,consistentwiththetrendwesawlastyear(seeFigure7).Regionally,NorthAmericaiscatchingupwithEuropeduetoincentivesincludedintheUS’sInflationReductionAct(IRA)—anearlyindicationofhowquicklycompaniescanreacttopositivepolicysignals(seeFigure8).Asaresult,someexecutivesinotherregionsexpressedconcernsaboutcompetitivenessandtheneedforequivalentpolicysupportinothercountries.“Inthetransitionprocesstowardsamoresustainableindustry,policymakersmustmakesurethatEuropecanmaintainitscompetitivenessvs.otherregionsthatdonotapplythesameenvironmentalstandards.”—Chemicalsexecutive,EuropeAcrosssectors,executivesexpectedaboutthesamelevelsofcapexinvestment,exceptinmining,whereexpectationsincreasedsignificantly,possiblyinresponsetorisingdemandfortransitionmineralslikecopper,nickel,andlithium(seeFigure9).Figure7:Companiescontinuetoincreasetheircapexallotmenttonew,low-carbongrowthareasExpectedshareofcapexallocatedtonewgrowthareas24%16%2020survey2023surveySources:BainENRTransitionSurvey2020(n=81);BainENRTransitionSurvey2023(n=608)12EnergyandNaturalResourcesReport2023Figure8:GovernmentpolicychangesmayhavespurredgrowthinNorthAmericanlow-carboninvestmentsExpectedshareofcapexallocatedtonewgrowthareas30%2010202320220EuropeAsia-PacificNorthAmericaSources:BainENRTransitionSurvey2022(n=1,037);BainENRTransitionSurvey2023(n=608)Figure9:Capexallocationtonewgrowthareasacrossindustriesisfairlyconsistentwithlastyear,exceptforanotableincreaseinminingandmineralsExpectedshareofcapexallocatedtonewgrowthareas30%2020222023100OilandgasUtilitiesandMiningandAgribusinessChemicalsrenewablesmineralsSources:BainENRTransitionSurvey2022(n=1,037);BainENRTransitionSurvey2023(n=608)13EnergyandNaturalResourcesReport2023Newtechnologies.Astheydidlastyear,executivesbelievethethreemostimportanttechnologiesfor2030willberenewables,digital,andenergystorage.By2050,theyexpecthydrogentoreplacedigitalasakeytechnology,withmorethanfourinfivebelievingitwillhaveasignificantimpactontheirbusiness.Wefoundothernotablespikesbyregionandsector(seeFigure10).Scalingnewbusinesses.Executivesremainconfidentthattheirlow-carbonbusinesseswillbecomesignificantby2030,with70%expectingthesebusinessestoaccountformorethan10%ofcompanyprofitsorvaluationby2030(seeFigure11).Weseesomevariationbysector.Forexample,executivesinminingandmineralsraisedtheirexpectationssignificantlythisyear,whereasoilandgasexecsshowedabitlessoptimismintheprospectsfortheirnew,low-carbonbusinesses,perhapsduetoimprovedmedium-termprospectsfortheirlegacyones.“[Theenergytransition]issomethingessentialforsurvival,anditwillarrivesoonerthanexpected.”—Oilandgasexecutive,SouthKoreaHowever,scalinglow-carbonbusinessesremainsextremelychallenging.ExecutivestoldusthattheroadblocksarelessaboutboldambitionandcompanycultureandmoreaboutbuildingascalableFigure10:Acrosssectors,executivesexpectdifferenttechnologiestomattermostby203074%67%70%71%67%ChemicalsOilandgasAgricultureandUtilitiesexecutivesExecutivesinexecutiveswhoexecutiveswhochemicalsexecutiveswhoexpectenergytheMiddleEastexpectcircularitytoexpectcarbonsignificantlychangecapture,usageandwhoexpectstoragetowhoexpecttheirbusinessstorage(CCUS)biobasedproductsbesignificantlow-carbontobesignificanthydrogentotobesignificantbesignificantSource:BainENRTransitionSurvey2023(n=608)14EnergyandNaturalResourcesReport2023Figure11:Expectationsarehighforthecontributionsofnew,low-carbonbusinessesby2030Shareofexecutivesexpectingtheirlow-carbonbusinessestoaccountformorethan10%oftheircompanies’profitsorvaluationby203080%604020232022200MiningandOilandgasUtilitiesandChemicalsAgribusinessmineralsrenewablesTotalenergyandnaturalresourcesSources:BainENRTransitionSurvey2022(n=1,037);BainENRTransitionSurvey2023(n=608)modelthatdeliversacceptablereturns(seeFigure12).(FormoreontheearlylessonsfromEngine2buildouts,readtheBainBrief“HowtoDoEngine2fortheEnergyTransition.”)Returnoninvestmentremainsasignificantchallengeforindividualcompanies,whichtheyareaddressingbybeingmoreselectiveandfocusingonopportunitiesthatgenerateacceptablereturns.Maintainingthoseacceptablereturnswhilescalingnewgrowthbusinessesremainsdifficultsincemostcustomersareunwillingtopayhigherpricesforessentialmassmarketgoodsandservices.Governmentpolicyandregulatorysupportarecriticaltodevelopandgrowthesemarkets.Investorsmayalsoneedtoreconsidertheircapitalallocationstrategiesinordertofundthelower-risk,lower-returninvestmentsneededinsomenewlow-carbonbusinesses.Companiesalsociteuncertaintyaboutaccesstotalentandorganizationalcapabilitiesasseriousimpedimentstogrowth.Whilegovernmentpolicyandpermittingremainthepredominantroadblockstothegrowthofnew,low-carbonbusinessesinthesector,oursurveyrevealedregionalnuances.Forexample,almosttwiceasmanyEuropeanoilandgasexecutivesblamedpolicyuncertaintyfordelayedinvestmentdecisions,comparedwiththepreviousyear(61%vs.36%in2022),whilefewerexecutivesinNorthAmericaassignedsimilarblame(50%vs.59%),possiblyshowingtheeffectsoftheIRA(seeFigure13).15EnergyandNaturalResourcesReport2023Figure12:Executivesarelessconcernedaboutinternalconstraints,moreconcernedaboutgovernmentpolicyandbuildingviablebusinessesShareofexecutiveswhoconsidereachfactortobeaverysignificantroadblocktoscalingtheirlow-carbongrowthbusinesses60%40200GovernmentLackofLackofSupplychainLackofLackofboldCulturalpolicyandorganizationalexperience/constraintscash/capitalambition/resistanceROI/customerregulationstalentinnewwithinthewillingnesscapabilitysupportfromcompanytopayforscalingbusinesscompanyatspeedareasleadershipSource:BainENRTransitionSurvey2023(n=608)Figure13:ViewsonpolicyuncertaintyshiftedamongNorthAmericanandEuropeanoilandgasexecutivesShareofoilandgasexecutiveswhobelievethatuncertaintyoverfuturegovernmentpoliciesisdelayinginvestmentinnewbusinessareas59%61%50%36%20222023NorthAmericaEuropeSources:BainENRTransitionSurvey2022(n=1,037);BainENRTransitionSurvey2023(n=608)16EnergyandNaturalResourcesReport2023Buildingorganizationalcapabilitiesandfindingtalentremainmajorchallengesforgrowinglow-carbonbusinesses,especiallyinseveralkeyroles(seeFigure14).Digitalandinformationtechnologytalentisatapremiuminallsectorsandregions.About60%ofexecutivesexpectdigitalandAItechnologiestochangetheirbusinessessignificantlyby2030,butthey’restrugglingtofindtalentthatcanhelpthemmanagethechange.Inaddition,aboutoneinthreecompaniesreportdifficultyfindingtheengineerstheyneed,andoneinfourarehavingtroublehiringfrontlineworkers.ThesituationismoreacuteinNorthAmerica,where39%ofcompaniesarehavingdifficultyfindingfrontlinelabor(seeFigure15).TalentisthetoproadblocktoscalinggrowthbusinessesintheMiddleEast,where42%ofcompanieshavedifficultyfindingfrontlineworkersand33%havetroublefindingsalesandmarketingtalent.ThemarketforfrontlineworkersappearsmuchmorefavorableinLatinAmericaandAsia.Afinalpointofconcernistheissueofresilience.Oursurveyfoundexecutivesconfidentorveryconfidentabouttheircompany’sresiliencetothephysicaleffectsofclimatechange—thoughwhetherthisconfidenceisjustifiedremainstobeseen(seeFigure16).Observingtheindustriesintheenergyandnaturalresourcesectors,webelievethatriskstophysicalassetsmaybegreaterthanmanycompaniesanticipate,andtheseriskshaven’tbeenfullyfactoredintotheirplanningandcapitaldeployment.Figure14:Digital,engineering,andothertechnicalrolesremainthetoughesttofill,withfrontlinelaborincreasinglydifficultShareofexecutiveswhociteanunfavorableenvironmentforfindingandkeepingtalentintheseroles40%3020100EngineersFrontlineOtherbackRegulatoryStrategy,InvestorandSalesandandtechnicallaborofficeandandlegalM&A,andstakeholdermarketingDigitalpartnershipsandITexpertssupportaffairsrelationsfunctionsSource:BainENRTransitionSurvey2023(n=608)17EnergyandNaturalResourcesReport2023Figure15:LabormarketchallengesvarybyregionNorthAmerica39%50%MiddleEastofexecssayofminingexecsLatinAmerica42%33%themarketforsaythemarketfrontlinelaborforengineers39%ofexecssayofexecssayisunfavorable,isunfavorable,themarketthemarketincludingover50%forfrontlineforsalesandasdo38%marketinginmining,intheoilandlaboristalentischemicals,andunfavorableunfavorablegassectoragribusinessofexecssaythemarketforfrontlinelaborisfavorable,comparedwithonly16%whosayit’sunfavorableSource:BainENRTransitionSurvey2023(n=608)Figure16:Executivesaremostconfidentabouttheirorganizations’physicalresilienceExecutives’levelofconfidenceregardingresilienceoftheircompanytodifferentfactorsVeryconfidentSomewhatconfidentNotatallconfidentPhysicaleffectsofclimatechangeFinancialinstabilityGeopoliticalrealignmentTechnologicalvulnerabilityInputshortagesandbottlenecks20406080100%0Source:BainENRTransitionSurvey2023(n=608)18EnergyandNaturalResourcesReport2023Inotheraspectsofresilience,executivesaremoreconcerned.Forexample,fewerthanoneinfiveareveryconfidentoftheirresiliencetosupplychainbottlenecks,whicharelikelytobecomeevenmoreacuteasnewbusinesseswithnewsupplydemands(forexample,newfeedstocksforrecyclingorbiofuel)attempttoscale.Observingtheindustriesintheenergyandnaturalresourcesectors,webelievethatriskstophysicalassetsmaybegreaterthanmanycompaniesanticipate,andtheseriskshaven’tbeenfullyfactoredintotheirplanningandcapitaldeployment.Whileenergyandnaturalresourceexecutivesseerealchallengesinpolicy,permitting,talent,andscalingnewbusinessesthatcangenerateacceptablereturns,theyremaincommittedtosteadilyincreasingcapitaldeploymentandplayingtheirpartintheworld’sbumpyjourneytonetzerobythelate2050s.19Data-RichPerspectivesTheDualChallengeoftheEnergyTransitionIsUrgentandUnprecedentedMeetingthegrowingdemandforenergywhilealsoreducinggreenhousegasemissionsisthecentralchallengeofthe21stcentury.ByJamesBaird,TorstenLichtenau,AlessandroCadei,andPrashantSarinAtaGlanceEnergysecurityhasmoveduptheglobalagendaoverthepast18months,magnifyingthetrade-offsandcomplexitiesinvolvedinnavigatingtheenergytransition.Thetensionbetweenenergysupplyandclimatechangepresentsadualchallengeforthe21stcentury:breakingthehistoricallinkbetweenenergyandgreenhousegasemissions.Solvingthechallengewillrequirechangeonanunprecedentedscaleandpace,includingmajorinfrastructureinvestments.Byonemeasure,theworldneedstonearlytripleannualinvestmentincleanenergytoreachnet-zeroemissionsby2050.Energyandnaturalresourcecompaniesareandwillcontinuetobeatthecenterofeveryaspectofthetransitiontocome.20EnergyandNaturalResourcesReport2023ThewarinUkraineandensuingdisruptiontotheglobalenergysystemhaveremindedusallthataffordable,reliableenergyisthefoundationuponwhichmoderncivilizationrests.Fromtheelectricityusedtolightourhomes,totheliquidfuelspoweringcarsandplanes,totheenergyneededtoproducefertilizerforgrowingourfood,energyisintegraltoeverythingwedo.Themassiveexpansionofprimaryenergysupplysincethe19thcenturyhasdrivenanunparalleledimprovementinhumanlongevityandprosperity.However,thosebenefitshaven’tbeenequallydistributed.Thereisstillconsiderableenergypoverty,concentratedprimarilyintheGlobalSouth.About675millionpeoplelackaccesstoelectricity,and2.3billionpeople—almost30%oftheworld’spopulation—don’thaveaccesstocleancookingfuelsandtechnologiesthatpreventprematuredeathfromindoorairpollution.Futurepopulationgrowthwillbeoverwhelminglyconcentratedintheseregions,withthepopulationofsub-SaharanAfricaaloneexpectedtoalmostdouble(seeFigure1).Theworldneedsmoreenergy.Yetourlargestprimaryenergysources,fossilfuels,arealsothelargestsourcesofanthropogenicgreenhousegasemissions.Fossilfuelsaccountforaround80%ofourprimaryenergysupply,andourrelianceonthemhasnotchangedappreciablyin30years.Risinggreenhousegasconcentrationintheatmosphere,producedinlargepartbytheproductionandcombustionoffossilfuels,iscausingFigure1:Theglobalpopulationisexpectedtoincreaseby1.7billionby2050,mostlyintheGlobalSouthPopulationgrowthbetween2022and2050NorthAmericaEUandUKEuropeandCentralAsiaEastAsiaandPacific+45M–17M+14M–12M(+12%)(–3%)(+4%)(–5%)LatinAmericaSub-SaharanMiddleEastChinaandCaribbeanAfricaandNorthAfrica–109M+90M+978M+184M(–8%)(+14%)(+82%)(+38%)SouthIndiaSoutheastAsiaAsia(except+256M+110MIndia)(+18%)(+16%)+206M(+41%)Sources:UNWorldPopulationProspects2022(mediumfertilityvariant);BPStatisticalReviewofWorldEnergy2022;WorldBank;EIA;Bainanalysis21EnergyandNaturalResourcesReport2023theplanettowarm,andthereisnowclearscientificconsensusthatadverseconsequencesforhumanprosperityandwell-beingwillresultifthiswarmingtrendcontinues.Thetensionbetweenenergysupplyandclimatechangepresentsadualchallengeforthe21stcentury.Howwilltheworldincreaseenergysupplywhilesimultaneouslycurbingemissions?Thescaleandpaceofchangerequiredtosolvethechallengeareunprecedentedandextraordinary.Byonewell-knownmeasure,theIEA’sNetZeroEmissionsby2050Scenario,theworldwouldneedtoapproximatelydoubleits2022paceoftotalenergyinvestmentby2030andsustainthislevel,orslightlylower,through2050toachievenet-zeroemissions.Thisincludesnearlytriplingannualinvestmentincleanenergy.Thetensionbetweenenergysupplyandclimatechangepresentsadualchallengeforthe21stcentury.Howwilltheworldincreaseenergysupplywhilesimultaneouslycurbingemissions?Manyenergyandnaturalresourceexecutivesareacutelyawareoftheserealities.Butasenergysecurityhasmoveduptheglobalagendaoverthepast18months,thedifficultroadaheadfortheenergytransitionhasbecomeevenclearer.Energyandnaturalresourcecompaniesareandwillcontinuetobeatthecenterofeveryaspectoftheunfoldingtransition,andhowthesecompaniesnavigatetheaccompanyingopportunitiesandriskswillhavemajorimplicationsforhowthedualchallengeultimatelyplaysout.(Readthenextchapterofthereportformoredetail.)TheneedformoreenergyTheworldmustincreaseitsenergysupplytosupporthumanwell-beingandeconomicgrowth.Historically,globalenergyconsumption,population,andgrossdomesticproducthavegrownintandem(seeFigure2).Inlessmatureeconomies,smallincreasesinenergyconsumptionpercapitaarestronglyassociatedwithsignificantgainsintheHumanDevelopmentIndex,aUnitedNationscompositemeasurecomprisedofindicatorsforhealth,education,andincome—supportingthenotionthatenergyiscriticaltohumanprosperity.Despitesubstantialgrowthintheworld’senergysupplyoverthelast150years,billionsofpeoplestilldon’thaveaccesstoenoughaffordable,reliableenergy.Populationgrowthoverthenextthreedecadeswillbeoverwhelminglyconcentratedintheseregions.Theirpopulationsandgovernmentswillcontinuetofocusonexpandingtheirenergysupplies—includingelectricitygenerationand22EnergyandNaturalResourcesReport2023Figure2:GlobalenergyusehasalwaysgrownwiththepopulationandGDPGlobalenergyconsumptionGlobalGDP(petawatt-hours)(trillionsofconstant2011USD)200150Global150100energy100consumption5050GGlDoPbal0190019502000018502019World7.8population1.3(billions)73Averagelifeexpectancy29(years)Note:GDPisadjustedforpurchasingpowerparitySources:BPStatisticalReviewofWorldEnergy2021;VaclavSmil,EnergyTransitions:GlobalandNationalPerspectives,2017;MaddisonProjectDatabase2020,JuttaBoltandJanLuitenvanZanden,“Maddisonstyleestimatesoftheevolutionoftheworldeconomy:Anew2020update”;WorldBank;OurWorldinData;Bainanalysisinfrastructure,amongotherareas—tosupporteconomicdevelopmentandimprovelivingstandards(seeFigure3).Toputtheneedforincreasingtheworld’senergysupplyinevenstarkerterms,considerthefollowingthoughtexperiment.SaythatIndia,Indonesia,Pakistan,Nigeria,andothercountrieswithloworverylowenergyconsumptionpercapitatodayweretoincreasepercapitaconsumptionby2050tothelevelof,forexample,Mexicoinpursuitofeconomicgrowth,adesirablegoal.Globalprimaryenergyconsumptionwouldthengrowbyabout70petawatt-hours,orapproximately45%oftotalglobalenergysupplyasof2019.Efficiencygains,includingfromelectrificationandincreasedrenewableenergyuse,willoffsetsomeofthefuturedemand.Sofar,however,onlyadvancedeconomiescomprisingaminorityoftheglobalpopulationhavedecoupledeconomicgrowthfromenergyconsumption(seeFigure4).ConsequencesofbusinessasusualAbsentactionbothtodecarbonizeourexistingenergysupplyandtoavoidfurtheremissionsasdevelopingeconomiesadvance,significantrisksemerge—andtheserisksaren’tuniformlysharedacrosstheworld.23EnergyandNaturalResourcesReport2023Figure3:Energyconsumptioniscorrelatedwitheconomicprogress,andthereisstillconsiderableinequalityPrimaryenergyconsumptionpercapita,2019(megawatt-hours)100EmergingcountriesAdvancedcountries5.1billionpeople1.1billionpeopleLow-incomeBirthrate:16/1,000Birthrate:10/1,00075developingcountriesUS1.6billionpeopleBirthrate:31birthsRussiaChina50per1,000peopleannuallyJapanGermanyUKDemocraticRepublicBangladeshIndonesiaPopulation25oftheCongoNigeria50,000Pakistan1BEthiopia5,00050MIndia100,00001,000BrazilMexico20,00050010,000GDPpercapita,2019(constant2015USD)Notes:GDPpercapitaisshownonalogarithmicscale;countrycategorizationreflectsIMFeconomyclassificationsystemSources:WorldBank;IMF;BPStatisticalReviewofWorldEnergy2022;EIA;UNWorldPopulationProspects2019;OurWorldinData;BainanalysisFigure4:Sofar,onlyadvancedeconomieshavedecoupledeconomicgrowthfromenergyconsumptionPrimaryenergyconsumptionpercapita,inmegawatt-hours199020002010201910080%ofglobal20%ofglobal80populationpopulationUSSouthKoreaOnlyadvancedeconomieshavemanagedtoreduceenergyconsumptionwhile60maintainingeconomicgrowth40JapanGermanyChinaEgyptUK20IndiaChileBrazilWorldLessmatureeconomieshaveseenpercapitaIndonesiaenergyconsumptionrisewitheconomicgrowth00204060GDPpercapita,inthousandsofconstant2015USDSources:WorldBank;BPStatisticalReviewofWorldEnergy2022;EIA;IMF;Bainanalysis24EnergyandNaturalResourcesReport2023Ashuman-inducedclimatechangeisprincipallyafunctionoftheatmosphericconcentrationofgaseslikecarbondioxide,thecumulativeemissionstotaloveraperiodofdecadesmatters.Humanactivityhascausedthereleaseofmorethan2trillioncumulativetonsofcarbondioxideworldwidesince1850,andabout45%ofthatwasemittedbetween1990and2021(seeFigure5).It’sworthnotingthattheworldhasmadesomeprogresstowardclimatetargetsinrecentyears.AftertheParisAgreementin2015andensuingpolicycommitmentsbynationalgovernments,thetemperatureestimatesforend-of-centurywarminghadfallenbyaroundahalf-degreeCelsiusasof2020.Still,globalCO2emissionsfromfossilfuelsreachedanewhighin2022,andthere’snosignthatemissionshavepeaked.Warmingcausedbyhumanactivityhasalreadyproducedadverseimpactsonbothnaturalandhumansystems,includingincreasedfoodandwaterinsecurity;damagetoterrestrial,freshwater,coastal,andoceanmarineecosystems;andspecieslosses.Continuedwarmingwillverylikelyleadtohigherfrequencyandintensityofcertaintypesofextremeweather,suchasextremeheatevents,heavyprecipitationevents,andsevereagriculturalorecologicaldroughts.What’smore,futurerisksaren’tuniformlydistributed,withSoutheastAsiaandsub-SaharanAfricadisproportionatelyexposedtothenegativeconsequences(seeFigure6).Figure5:Humanactivityhascausedthereleaseofmorethan2trillioncumulativetonsofCO2since1850CumulativeglobalCO2emissionsfromenergyandlandusechange(trilliontons)3T45%ofallanthropogenicCO2emissionssince1850werereleasedbetween1990and20212Energyandindustry1emissions0187519001925195019752000Landuse1850emissions2021Note:Excludesnon-CO2emissionssuchasmethaneSources:GlobalCarbonProject;OurWorldinData;Bainanalysis25EnergyandNaturalResourcesReport2023Figure6:Futureclimatechangeriskvariesconsiderablybyregion,withSoutheastAsiaandsub-SaharanAfricadisproportionatelyexposedShareofpopulationathighorveryhighriskAfricaAmericasAsiaEuropeOceania100%Melanesia7550SoutheastAsia250Sub-SaharanAfricaCentralAsiaMicronesiaNorthernLatinAmericaandAustraliaandPolynesiaAfricatheCaribbeanNewZealandSouthAsiaEastEasternEuropeNorthernEuropePopulationAsiaWestAsiaWesternEurope1BSouthernNorthAmerica50MEurope25102050100GDPpercapita,2019(thousandsofcurrent2019USD)Notes:ShareofpopulationatriskbasedontheWorldRiskIndex,whichassessestheriskofdisasterasaresultofnaturalhazards,incorporatingexposureandvulnerability,andisusedbytheIPCCtogaugeregion-andcountry-levelclimatechangerisks;GDPpercapitaisshownonalogarithmicscaleandisadjustedforpurchasingpowerparitySources:IPCC,SixthAssessmentReport;WorldRiskReport2021;WorldBank;BainanalysisThepaceandfrictionsofchangeAvoidingtheworstrisksofclimatechangewillrequiretheworldtoreduceandeventuallyeliminategreenhousegasemissionsproducedbyhumanactivity.Scenariosinwhichtheaverageincreaseinglobalsurfacetemperatureisheldbelow2degreesCelsiusby2100implymassive,nearlyimmediate,andsustainedemissionsreductions;by2050,thelevelofanthropogenicgreenhousegasemissionswouldneedtobeatleast60%lowerthanitistoday.Achievingthiswouldnecessitatesubstantial,rapidchangestoourenergysystem,whichisresponsibleforaboutthree-quartersofanthropogenicgreenhousegasemissions.Doingthisin27yearswouldbeunprecedented.Historysuggeststurningoverevenone-quarteroftheglobalenergysupplytakesatleastthreedecades,reflectingtheassetintensityoftheenergysystem.It’snotablethateachtimetheworldtransitionedtoanewprimaryenergysource,fromcoaltocrudeoiltonaturalgas,thedisplacedprimaryfuelsourcedidn’tdisappear.Infact,thequantityofprimaryenergysuppliedbycoal,oil,andgasistodayatornearall-timehighs.Thephysicalscaleofwhatmustbeaddressedishardtocomprehend.Consider,asoneexample,ourenergyproductionandprocessinginfrastructure,whichiscapableofhandlingmorethan15billion26EnergyandNaturalResourcesReport2023tonsofcoal,oil,andgasextraction,processing,anddistributioneachyear.Thisinfrastructureincludesanoilandgaspipelinesystemthat,iflinedupendtoend,wouldwraparoundEarthnearly30times.Unsurprisingly,theamountofcapitalrequiredtoreplace,repurpose,orotherwisemitigatethewarmingimpactofourenergysystemsoquicklyisenormous.Andthatdoesn’tincludethesignificantcapitalrequiredtobuildentirelynewenergyinfrastructuretosupportrisingdemandinplacescurrentlyexperiencingenergypoverty.Inourview,veryfewcomponentsoftheenergysystemarepreparedforchangeatthescaleandpacerequired.DefiningthetensionPuttingtheseelementstogether,apictureemergesoftheextraordinarilychallengingpathwemusttaketoresolvethedualchallenge(seeFigure7).First,it’simperativethattheworldreduceanthropogenicgreenhousegasemissionstolimitthenegativeimpactsofclimatechange,butwe’renotontrackforascenarioinwhichtheworldwarmslessthan2degreesCelsiusabovepreindustriallevels(seefirstpanelinthechartbelow).Atthesametime,energysupplywilllikelyneedtoincreaseinthecomingdecadestosupporteconomicgrowthandenhancehumanwell-being,thoughefficiencygainswillprovidesomebuffer(seesecondpanel).Figure7:Solvingthedualchallengewillrequireexpandingaffordable,reliableenergyaccesswhilesimultaneouslyreducingemissionsEmissionsEnergyThechallengeGlobalprimaryenergydemandGlobalannualgreenhousegasGlobalprimaryenergydemand(petawatt-hours)emissions(gigatonsofCO2-equivalent)(petawatt-hours)25080250athto205070TrendfromimplementedpoliciesP(2.5°C–3.5°C)200200Pathto20506050Ifwarmingis1502021150202140limitedto2°C20102010301002000100200019901990201980198050197050197010Ifwarmingis0limitedto1.5°C0002550751001251501750102030405020101520253035404550GlobalGDPGlobalCO2emissionsYear(trillionsofconstant2015USD)(gigatons)Notes:Warmingfiguresinleft-sideemissionschartarerelativetothepreindustrialperiodandreflectprojectedwarminglevelby2100ineachscenario;boldlinesinleft-sideemissionschartrepresentmedianestimate,andshadedregionsreflectarangefromthe25thto75thpercentile;emissionsinright-sidechartreflectglobalCO2emissionsinclusiveoflandusechangeandexcludenon-CO2emissionslikemethaneSources:IPCC,SixthAssessmentReport;WorldBank;GlobalCarbonProject;BPStatisticalReviewofWorldEnergy2022;Bainanalysis27EnergyandNaturalResourcesReport2023Addingthesefactorstogether,wearriveatthetargetscenariointhethirdpanel:bendingtheemissionscurvewhilestillservinghigherenergydemand.Breakingtherelationshipbetweenenergyandemissionsisattheheartofthedualchallenge.Theessenceofitisachieving“lowcarbon”withoutcompromising“reliable,affordable,andsecure”astheenergysupplyexpands.Importantly,thejourneywillbedifferentforeverycountry.Inlow-incomedevelopingandemergingeconomies,theobjectiveistoliftcountriesoutofenergypovertyandsupportindustrializationinalow-carbonway,withouterectingbarrierstoeconomicdevelopment(i.e.,withoutfollowingthehistoricaltrajectoryofadvancedeconomies).Inadvancedeconomies,it’saboutreducingemissionswhilemaintaininghighlivingstandardsandeconomicgrowth.Companiesthatsucceedwillworkinincreasinglylocalizedwaystosupporttheenergyandcarbonjourneysofdifferentcountriesworldwide.Solvingthedualchallengewillbeenormouslydifficultduetoitscolossalscaleandcomplexityandtheimportancetosocietyofwhatwemustreplaceoraugment.Thecostoffailureineitherdirectionishigh:arapidlywarmingplanetandtheconsequentialenvironmentalrisks,orstifledeconomicprogressandlingeringquality-of-lifeconcernsforthebillionsofpeoplewholackaccesstosufficientenergy.Buttheoutcomeisnotpredestined,anditwilldependontheactionswetaketoaddressthechallenge.28Data-RichPerspectivesTheEnergyTransition:Fragmented,Disorderly,andRipewithOpportunityCompaniesthatcapitalizeonthetransition’sbottlenecksandscarcitieswillunlockbothshareholdervalueandasmoothertransitionfortheworld.ByMichaelShort,JorgeLeis,JamesNixon,andAnnSimlAtaGlanceBottlenecksandscarcitieswilldefinethepaceanddepthoftheenergytransitionineverymarketwhilealsocreatingsubstantialopportunities.Locatingandcapturingreturnsoninvestmentinlow-carbonbusinesseswillbeagreaterchallengethanaccessingcapital.Tosucceed,companieswillneedtobuildnewstrategicandoperationalmusclesandtoviewvaluechainsdifferently.29EnergyandNaturalResourcesReport2023Insomeaspectsoftheenergytransition,we’reseeingstartlingprogress.Therewererecordinvestmentsinthefutureenergysystemin2022(1%–2%ofglobalGDP),includinganetadditionofmorethan250gigawattsofwindandsolarcapacity.NewelectricvehiclesaleshavedoubledacrossEurope,theUS,andChina.Majorcleanenergystimuluspolicy—includingtheUSInflationReductionAct—ispumpingbillionsofdollarsintothecleanenergyeconomy.Atthesametime,geopoliticalandeconomicforceshavedampenedprogressinotherareas.InthewakeofRussia’sgassupplycuts,variousEuropeancountriesfiredupcoalplantsforelectricitygeneration.Indiaretreatedfromitsthermalcoalimporttargetsduetothepowercrisisfollowinglastyear’sheatwaves.Policymakersinsomejurisdictionsenactedfiscalmeasuresandpriceinterventionstoreducetheimpactofrisingenergybillsonconsumers.There’snoclearconsensusonwhatthetransition’sendpointwilllooklikeorwhatpathwaywilltakeusthere.Forexecutivesofenergyandnaturalresourcecompanies,themorepressingconcernisnavigatingtheglobalenergyandcarbontransitionalreadytakingplace.Eveniftheworldcan’tmeetitsambitionsforlimitingwarmingto1.5degreesCelsiusabovepreindustriallevels,thetransitionwillprovemassivelydisruptivetotheenergysector.There’snoclearconsensusonwhatthetransition’sendpointwilllooklikeorwhatpathwaywilltakeusthere.Forexecutivesofenergyandnaturalresourcecompanies,themorepressingconcernisnavigatingtheglobalenergyandcarbontransitionalreadytakingplace.Thismulti-decadeperiodoftransitionislikelytobemessy,involvingmorefrequentshockstokeycommoditymarketsandvaluechains.Theworldisn’tinvestinginnewenergysystemsfastenoughtodeliverthemquickly,norisitinvestingintraditionalenergysources(whichremainnecessaryduringthetransition)atthelevelshistoricallyrequiredtosustainthem.Inaddition,ratherthancollaborativelymanagingacomplextransition,theworldisfragmentingeconomicallyandgeopolitically.Companiesthatleanintothiserawithenthusiasm,evenifitrequiresadeparturefromthewaysofthepast,willbewellpositionedtobothcreatetremendousvaluefortheirinvestorsandunlockasmootherenergytransitionfortheworld.30EnergyandNaturalResourcesReport2023BottlenecksshapethepaceandprofitsExecutivesareofcoursefamiliarwiththelawsofsupplyanddemand,butviewingtheenergytransitionthroughthelensofbottlenecksandtheirresultingscarcitiescanhelpcompaniesspotbusinessopportunities.Scarcitygovernsaccesstoresources,infrastructure,commodityflows,andprofitpools.Whendemandexceedssupply,itcreateseconomicrentsthatinduceinvestmenttoeasethescarcity—whetherit’saglobalcommodityorapieceofequipmentinalocalinfrastructurenetwork.Bottlenecksandscarcitieswilldefinethepaceanddepthoftheenergytransitionineverymarketandsector.It’shelpfultothinkoftheminthreecategories:paying,building,andoperating.Bottleneck1:Whopays?Energytransitionprogressisoftenmeasuredbythegapbetweencapitalrequiredandcommitted.Althoughtheworld’scommittedinvestmentsfallfarshortoftheannualcapitalrequiredtoreachnetzeroby2050,capitalitselfisn’tnecessarilytheconstrainingfactor.It’savailableinmostenergyandnaturalresourceindustries,butinsteadofbeingreinvestedforgrowth,anincreasingpercentageisbeingreturnedtoshareholders.Thisisthecaseintheoilandgasandminingindustries,forexample.Meanwhile,inutilities,theshareofcapitalbeingreinvestedforgrowthissteadyandcapitalexpendituresareincreasing(seeFigure1),Figure1:Someenergysectorsarereturningagrowingshareofcapitaltoshareholders,whileothersaremaintainingtheshareofcapexExpenditures($B)4784954373633611631771971982101281419284Stockbuybacks20181920212220181920212284DividendsOilandgasUtilities2018192021CapexMining22Shareof58%43%81%83%56%44%capitalreinvestedforgrowthNotes:Includes75ofthetopenergyandnaturalresourcefirmsbymarketcapitalizationineachsector;capexexcludesM&ASources:S&PCapitalIQ(asofApril2023);Bainanalysis31EnergyandNaturalResourcesReport2023butit’snotyetenoughtomodernizeandexpandthegridforthetargetlevelsofrenewableenergyandelectrification.Whyisthis?Globalenergyandnaturalresourceexecutivesranktheavailabilityofcapitalamongthebottomthreebarrierstoscalinguplow-carbonbusinesses,accordingtoBain’s2023energytransitionsurvey(seeChapter1ofthisreport).Instead,returnoninvestmentandcustomerwillingnesstopayaretopofmind.Bottlenecksandscarcitieswilldefinethepaceanddepthoftheenergytransitionineverymarketandsector.It’shelpfultothinkoftheminthreecategories:paying,building,andoperating.Withoutdemandthat’ssufficientlyprofitableonarisk-adjustedbasis,there’slimitedincentivetodevelopsupplyortheinfrastructurerequiredtomakesupplyanddemandmeet.Thismakeseconomicreturnsafirst-orderscarcity,andlocatingandcapturingthemwillbeaprimarychallengeofthetransition.Onepathistoanchoronendmarketsandconsumerswhoarewillingtopaythegreenpremiumassociatedwithmanynewenergysources.Everynewtechnologyhastheseearlyadopters,butidentifyingandsellingtothemrequiresadifferentmindsetformostcompanies.Withoutenoughcustomerswillingtopay(orregulationsdrivingthemtodoso,asisthecaseinEurope,whereindustrialconsumersaresubjecttoacarboncap-and-tradeprogram),theonlyothermajorsourceoffundingwouldbegovernments(taxpayers).Thiscouldtaketheformoftaxingalternatives,subsidiesthatalleviatethecostofproduction,ordirectfunding.Encouragingexamplesexistacrosstheglobe.TheUSandEUhaveimplementedpolicymeasurestoadvancethetransition,supportedbysignificantgovernmentfunds.Theseregionsrepresentthelion’sshareofglobalgovernmentinvestmentsincleanenergy.However,withsteeplyincreasinginterestratesanddebt-to-GDPratiosintheUSandEU,itwillprovemoredifficulttopayfortheseinitiatives.Economicreturnsmaybeevenhardertofindinthedevelopingworld,wherecountryriskpremiums,counterpartyandcurrencyrisk,andlackofinfrastructurecanpushrequiredreturnsmuchhigherthaninOECDcountries.Policycanrearrangetherulesoftheeconomicgameboardquicklyanddramatically.Withgeopoliticsandtheworldeconomygenerallyfragmenting,it’ssafetoassumethatthelocal/nationalpolicylandscapewillbeatleastasimportantasglobalinstitutions.TheUSInflationReductionAct(whose32EnergyandNaturalResourcesReport2023passagewasasurpriseinmanycircles)madegreenhydrogenproductioninstantlycostcompetitivewithgrayhydrogen—andsparkedabacklashintheEU.Inmanyareasofthenewenergyecosystem,marketswillnotonlyberegulatedbypolicybutmayindeedbecreatedbygovernment.Forcompaniesthattypicallyshyawayfromstroke-of-penrisk,therearecompellingreasonstobereadytoshapeandseizestroke-of-penopportunity.Bottleneck2:Whobuilds?AccordingtoBainresearch,125ofthetopenergyandnaturalresourcefirmsbymarketcapitalizationineachsectorcontinuetomodestlyincreasethecapitalallocatedtolow-carbongrowthareas(seeFigure2).However,developingnewenergysystemsandinfrastructureatanythingnearthepaceexpectedforthetransitionmaypushsupplychaincapacitybeyondthebreakingpoint,spurringtransformationinsomecases.Energytransitionambitionsdemandrecord-settinggrowthinmanysectors.Scarcitywillshapeandinhibitinvestmentdecisionsascompaniesseekaccesstoskilledpeople,manufacturingandprocessingcapacity,andrawmaterialsandotherinputs.Forexample,theworldisn’textractingenoughmetalsandmineralscriticaltorenewableenergytechnologiestomeetnet-zerotargets.AndtheUSwouldneedtomorethandoubleitsenergytransmissioncapacitytoFigure2:EnergyandnaturalresourcecompaniesareincreasinginvestmentsinnewgrowthareasCapitalexpenditures($B)508578445466Othercapex(companiesnotreportingEngine2capex)Othercapex(companiesreportingEngine2capex)$64.8B$74.9B$107.0BEngine2capex20212022$48.9BFutureannualizedtotal2020Notes:Includes125ofthetopenergyandnaturalresourcefirmsbymarketcapitalizationineachsector;Engine2referstonewbusinessesoutsideacompany’straditionalcore;futureEngine2capexreferstoannualizedcapexforecastsorcommitmentstoEngine2between2023and2030,withspecifictimehorizonvaryingacrosscompanies;wherefuturetotalcapexprojectionsweren’tprovided,themostrecentlyreportedtotalcapexfigureswereusedSource:BainEngine2database(asofMay2023)33EnergyandNaturalResourcesReport2023Figure3:USenergytransmissioncapacitywouldneedtomorethandoubletoreachtheInflationReductionAct’sfullrenewablepowergenerationpotentialUShigh-voltagetransmissioncapacitygrowthperyearProjection~5%–6%~2.3%~1.0%HistoricalpacePacerequiredtounlockPacerequiredtoachieve(2010–20)fullpotentialofIRAnetzeroinUS(2020–30)(2020–30)Note:Transmissioncapacitygrowthmeasuredusinggigawatt-milesSources:PrincetonUniversity,Net-ZeroAmerica;PrincetonUniversity,ElectricityTransmissionIsKeytoUnlocktheFullPotentialoftheInflationReductionAct;J.P.Morgan,2022AnnualEnergyPaper;BainanalysistakefulladvantageoftheInflationReductionAct’spotentialimpactonrenewablepowergeneration(seeFigure3).Technologywillimproveandcostswilldeclinewithexperience,butscarcitypricingcanreversethosecostimprovementsforaslongasittakestorelievethebottleneck.Justassupportiveeconomicsareuncertainforenergyproducersandsuppliers,therestofthevaluechainisalsowaryofmakinglargeinvestmentsbasedonpredictionsofnewenergyadoption.Forward-thinkingcompanieswillanticipatethesebottlenecksandshortages,whichwilloftenoccurseveralstepsremovedfromthenewenergycommoditythatgetstheheadlines.Dependingonafirm’sstartingposition,itcaneitherseektoplaydefense(lockinginsupplycertaintyevenifabottleneckemerges)oroffense(positioningitselfaroundthepotentialbottlenecktocapitalizeonsurgingdemandifandwhenitmaterializes).That’swhyGeneralMotorsinvested$650millioninalithiumdevelopmentproject,Fordhasmadesimilarlong-termpurchasecommitments,andTeslaisconsideringallformsofbackwardintegrationintokeymaterials—anapproachconsistentwiththeearlydaysofSpaceX.Bottleneck3:Whooperates?Operationalrequirementsarechanging,probablyfasterthanatanypointinthesector’shistory.Oneclearexample:AscompaniesreducetheirScope1and2carbon34EnergyandNaturalResourcesReport2023emissions,they’llneedagrowingsupplyoflow-carbonpower.Thequestioniswhetherthatcanbereliablycontractedinthecontextofutilitymarketstructuresthatalsomustevolvesignificantly.Insomecases,thecompanymayprefertosecuresupplyandgeneratethatpoweritself.Earlyexamplesshowwhathappenswhenthischallengeisn’taddressed.AveragepoweroutagedurationintheUSduetomajoreventsmorethandoubledbetween2016and2021.EnergymarketsinEuropewerestrugglingtodeliverenoughreliable,low-costpowertothegrid—lowcarbonorotherwise—inthesecondhalfof2021,evenbeforeRussia’sinvasionofUkraine.AndPakistanroutinelyexperiencesrollingblackoutsevenonnormalweatherdays,driveninpartbyitsinabilitytoaccessacontinuoussupplyofliquefiednaturalgaswhengaswasscarce,inspiteofexistingcontracts.Ratherthanwaitingforthedusttosettlewhileotherssettheoperationalnormsofthefuture,leadingcompanieswillanticipatethesebottlenecksandmaneuverintopositionsofstrength.Thesteady-staterequirementstobothdeployandoperatethesenewersystemsatscaleareonlypartiallyvisibletousnow.Whatcantheindustrydotoensurethesupplyoftalentandsparepartsneededtoperformmaintenanceonwindturbinesorsolarfarms,keepasmartgridoperational,ordrivethefleetsofshipsandtrucksthatwillkeepnewenergycommoditiesmovingaroundtheworld?Totheextentthatnewsourcesofenergyareintermittentorreliantondifferentsupplychains,howdoesthesystemasawholeachieveresilienceandreliability?Howwillcompaniesobtainfeedstocktoproducebiofuelsatthescalerequiredtodecarbonizeairtravelorlong-haultrucking?Whowillearntherightintheeyesofresidentialandindustrialcustomerstooptimizesourcesandusesofenergybehindthemeter,andwithwhattechnologiesandcombinationsofassets?Ratherthanwaitingforthedusttosettlewhileotherssettheoperationalnormsofthefuture,leadingcompanieswillanticipatethesebottlenecksandmaneuverintopositionsofstrength.SucceedinginaneraofbottlenecksandscarcitiesForenergyandnaturalresourceexecutives,it’snotenoughtodecidewhichpartsoftheenergyecosystem(oldandnew)toparticipateinattheheadlinelevel.Themosteffectivecompanieswillchoosewheretoplayandhowtosucceedinawaythatcapitalizesontheopportunities.Whatevercourseacompanycharts,newmuscleswillberequired.Herearesomeofthemostconsequential.35EnergyandNaturalResourcesReport2023•Commercialcapabilities.Energyandnaturalresourcecompaniesareexploringhowtounlockprofitablecustomersegmentsviatheirgo-to-marketandcommercialexcellencecapabilities.Earlyadopterswithlesspricesensitivitymaynotalwaysbealargecustomersegment,butfindingandcateringtothemallowsacompanytoparticipateprofitablyandmaintainshareholdertrustevenasitstretchesbeyonditshistoricalcorebusinesses.•Proactivepolicyshaping.Somenaturalresourcecompanies(e.g.,regulatedutilities)areusedtosurvivingandthrivinginpolicy-drivenmarkets.Butformany,thisisanewmotion.Clearstrategiesandparticipationmodelslinkedtodeliberatepolicypositionsandtoolkitscanensurecompaniesarepositionedtobenefitasmarketrulesevolve;indeed,theycanhelpshapeentirelynewmarkets.Stakeholdercoalitionswillbecriticaltopreservelicensetooperate,collectivelyinfluencethepolicylandscape,andcreatetheconditionsrequiredforpositiverisk-adjustedreturns.•Valuechainsandparticipationmodels.Asitbecomesmoreessentialtoguardagainstorcapitalizeonbottlenecks,companiesareadoptingalessadversarialapproachtothesupplychain.See,forexample,ourbrief“EnergyTransition:DeliveringCapitalProjectsOnTimeandOnBudget,”whichillustrateshowleadingprojectownersareexploringmorecollaborative,mutuallybeneficialrelationshipswithcontractors.They’realsoincreasinglywillingtotrynewparticipationmodels,verticalintegration,creativepartnerships,andsystem-widethinking.•Capitalplanningandresilience.Companiesusedtodeployinglong-cyclecapitalarebeginningtoreconsiderinvestmentcriteriawhentheywanttoparticipatebothinmarketsthatarehighrisk/highreturn(suchasresourceextraction)andinthosewithlowerrisk/lowerreturn(suchaspolicy-drivenmarkets).They’realsocontemplatingawidervarietyofrisks,rangingfromphysicalclimateresiliencetostrandedassets.(Formore,readtheBainBrief“ManagingStrandedCostsontheLongRoadtoNetZero”andChapter5ofthisreport.)Finally,uncertainfuturescallforportfoliosofbetsandlow-costoptions,wherenoteveryinvestmentisexpectedtopanout.Theroadaheadwillbeneitherstraightnorsmooth.What’sclearistheneedtoemphasizedifferentcapabilities,changeworldviews,andevolveparticipationmodels.Theenergytransitioniswellunderway.Buttheunwelcomenewsforanyoneexhaustedbythevicissitudesofrecentyearsisthatwe’reclosertothebeginningthantheend.Theroadaheadwillbeneitherstraightnorsmooth.What’sclearistheneedtoemphasizedifferentcapabilities,change36EnergyandNaturalResourcesReport2023worldviews,andevolveparticipationmodels.Itwon’tbeenoughtotripledownononestepofthevaluechainandtrustglobalcompetitivemarketstotakecareoftherest.Leadingcompanieswillexpandtheaperturetotrackthewholesystem,takingdeliberatepositionsbasedonclearbeliefsaboutwheresustained,defensibleopportunitywillbecreated.Aherdmentalitywon’thelpspottheopportunitiescreatedbydisruption.Thosewhocananticipatethescarcitiesanddevelopatailoredplantoattackthemwillcreatemeaningfulshareholdervaluewhilealsodoingtheirparttogreasethestickywheelsoftheenergytransition.37Full-PotentialAgendaWillingbutNotAble?TheEnergyTransitionHasaScalingProblem............40FourImperativesforBuildingResilienceinEnergyandNaturalResources........49TheEnergyTransition’sOtherBigPuzzle:MakingtheMathWork..............55Full-PotentialAgendaWillingbutNotAble?TheEnergyTransitionHasaScalingProblemEmergingleadersareidentifyingtailoredsolutionsforscalinguptomorrow’senergysystems.ByBrianMurphy,FelipeGattass,KatherineDixon,EmilyEmmett,andNirFeinsteinAtaGlanceAnumberofpracticalbarriersstandinthewayofrapidlybuildingthephysicalinfrastructurethattheenergytransitionrequires.Overcomingthemwillbecrucial,butmanyenergyandnaturalresourceexecutivesarestrugglingtoidentifythesolutionsbestsuitedtotheircompanies’needs.Leadingcompaniesareapplyingtailoredapproachesthatfocusonsolvingscalingchallengesdifferentlyinfourareas:development,integration,venturing,andinvention.40EnergyandNaturalResourcesReport2023Achievinganythingclosetonet-zeroemissionsby2050representsacivilization-widetransformationoftheenergysystemandagenerationalopportunityformanyenergyandnaturalresourcecompanies.Itwillrequiremillionsofnewworkerstochangeovertensofmillionsofpiecesofmachineryandequipmentacrossboththeenergyandrawmaterialssystems,andtodevelophundredsofminesandsupplychainsforrawmaterials.Itwillalsorequireaccesstomillionsofacresoflandforrenewables;energytransmission,distribution,andstorage;andothernecessities.Existinglow-carbontechnologieswillneedtobedeployedmuchfaster.Futuretechnologieswillneedtomoverapidlyalongthedevelopmentanddeploymentcurve.Achievinganythingclosetonet-zeroemissionsby2050representsacivilization-widetransformationoftheenergysystemandagenerationalopportunityformanyenergyandnaturalresourcecompanies.Inshort,allelementsofthenew,low-carbonenergysystemandmanycontinuingelementsoftoday’senergysystemwillneedtoscaleup—andfast.Energyandnaturalresourceexecutivesstandreadytogettowork,buttheyfaceanumberofbarrierstoscalingtheirefforts,ourannualsurveyof600-plusindustryleadersfound.Manyelementsareinvolvedinscalingupnewenergysolutions,includingmakingthemathworkandensuringthenewsystemsareresilientinachangingclimate.Butoncethoseelementsareinplace,there’sstillthemorepracticalchallengeofgettingprojectsdone.Our2023surveyfoundexecutivesaren’tasconcernedabouttheircompanies’internalwilltoscaleuplow-carbonbusinesses;relativelyfewseeculturalresistanceorlackofleadershipsupportandambitionassignificantroadblocks.Executivesaremoreworriedaboutwhetherthey’llbeabletoscaleuplow-carbonbusinesses,astheyfacebarriersrelatedtocustomers,regulators,supplychains,andinternalcapabilitiesandexperience(seeFigure1).Thespecificbarrierstoscaling—andtheirsolutions—areuniquetoeachcompany,technologytype,andproject.Scalingamaturerenewableenergysolutionlikeonshorewindwillbedifferentfromscalinganearly-stageonelikesecond-generationbiofuels.Scalingdemand,suchasforgreenhydrogenofftake,willbedifferentfromscalingsupply(e.g.,electrolyzermanufacturingcapacity).Scalingsomethingthatisclosertotheexistingcorebusiness—suchasreservoircarboncapture,utilization,andstorage(CCUS)foranoilandgascompany—isdifferentfromscalingsomethingdistantfromthecorebusiness,suchasanalternative-carbon-productsbusinessforanoilandgasfirm.ManyexecutivesfaceseveralofthesedilemmaswithinthesamecorporateP&L.41EnergyandNaturalResourcesReport2023Figure1:Manycompaniesappearwillingtoscaleuplow-carbonbusinesses,butit’sunclearwhetherthey’llbeabletodosoShareofexecutiveswhoconsidereachfactortobeaverysignificantroadblocktoscalingtheirlow-carbongrowthbusinesses60%40200GovernmentLackofLackofSupplychainLackofLackofboldCulturalpolicyandorganizationalexperience/constraintscash/capitalambition/resistanceROI/customerregulationstalentinnewwithinthewillingnesscapabilitysupportfromcompanytopayforscalingbusinesscompanyatspeedareasleadershipSource:BainENRTransitionSurvey2023(n=608)Ononehand,thefactthateachsolutionwillvaryisformidable,and,fromaclimatechangeperspective,frightening.Ontheotherhand,breakingitdowncanhelpidentifythemosteffective,tailoredstrategy.Theemergingleadersarefocusingonfourcommonscalingchallenges:•Development—stage-gate-likematurationofamaterialpieceofinfrastructureorasupplychain•Integration—piecingtogetherdisparate,existingbuildingblocksacrosstechnology,capabilities,valuechains,ormarketparticipants•Venturing—scalingupearly-stagegrowthopportunitiesoutsidethecorebusiness•Invention—innovatingandgeneratingnewideasPartoftheartofscalingistoensurethattherightsolutionsareappliedtotherightchallenge.Forexample,atraditionalscalingapproachthatworksfordevelopmentprojectscouldkillaventuringopportunity.Similarly,Agileinnovationisn’ttheanswertolong-cycleinfrastructureprojectdevelopment.Thismaysoundintuitive,butintherushtosolvethescalingproblem,manycompaniestakethewrongpathandstallprogress.Andbecauseanygivencompanywillhaveaportfolioofenergytransitionpriorities,itmayneedtoexecuteacrossallfourscalingchallengessimultaneously.Thatbecomesarealtestofbusinesscapabilities.42EnergyandNaturalResourcesReport2023ScalingchallengeNo.1:UnlockingdevelopmentPartsoftheenergyandnaturalresourcesystemthatalreadyexistatscale,withmaturetechnologies,willneedtorampupsignificantlytomeetgrowingdemand.Andthewayinwhichtheymustrampupisalreadyfamiliartotheindustry:developmentprojects.However,theenergytransitionisputtingfreshpressureoncertainbottlenecks,suchasdevelopingcriticalmineralssupplyandprocessingcapacity;expandingtherolloutofmaturerenewabletechnologiesforenergygeneration,transmission,anddistribution;andexpandinggassupplytoeitheravoidcoalinadevelopingeconomyortomeetgrowingdemandforrenewablesandindustrialfeedinadevelopedeconomy.Technologicalinnovationremainsimportanttoscalingupdevelopmentprojects,butthekeyisreducingdevelopmenttime,bothtoreachthemarketandthentoexpand.Considerthedauntingspeedandscaleofmetalsandmineralssupplygrowthrequiredby2030toachievenet-zerogoals:Nickelandcobaltproductionneedtodouble,whilelithiummustincreasesevenfold.Bain’supper-rangesupplyforecastsanticipatesignificantshortfalls(seeFigure2).Manylargecapitalprojects,suchasmines,processingplants,offshorewindprojects,andpowertransmissionanddistributioninfrastructure,requireover10yearstocometofruition.Now,astheenergytransitiondemandsadifferentpaceandscale,thatprojectleadtimeisrunningintobottlenecksintwocriticalareas:stakeholderalignmentandworkforcecapacity.Figure2:Projectedmetalandmineralsuppliesin2030fallwellshortofmeetingdemandinanet-zeroscenario1.5x2.1x7.2x2.3xCopperNickelLithiumCobalt2021supply2030demandinanet-zeroscenario2030supplyprojection(highendofpotentialrange)Sources:IEA,EnergyTechnologyPerspectives2023;S&PCapitalIQPro;Bainanalysis43EnergyandNaturalResourcesReport2023Gettingstakeholdersonthesamepagecansignificantlyshortentimetomarket.Permittinginparticularisoftenatime-consumingstep,usuallyduetoacombinationofprocessinefficiencies,increasinglycomplextrade-offs,andstakeholderengagementacrossclimateobjectives,environmentalissuessuchaslocalbiodiversityimpact,andcommunityconsiderations.InsomeEuropeancountries,renewableprojects’permittingprocesscantakeupto10years,despitetheEU’slegalmaximumof2yearsfornewprojects.Inresponse,theEUearlierthisyearmandatedthatmemberstatesdesignateareasinwhichtheywillsignificantlyreducewaittimesforrenewableprojects.Adeep,localunderstandingofthepolicyandcommunityenvironmentcaneasealignmentandcutdevelopmenttimebyyears.Whiletherearecostsassociatedwiththislevelofstakeholderengagement,thebenefitsofshorterpermittingtimearequantifiable,oftenmeaningtheseinvestmentspayoffrapidly.Workforcecapacityisalsoarisingbarriertoresourceandinfrastructuredevelopment.Considerthespeedatwhichpowergridsrequirebuildouts.HistoricaltransmissioncapacityintheUShasgrownabout1%peryearforthepastdecade.However,toachievethefullpotentialoftheUSInflationReductionAct(IRA),thatfiguremustdouble,andtostayontrackfortheend-of-centurywarmingtargetof1.5degreesCelsius,annualtransmissioncapacitygrowthwillhavetoincreasetobetween5%and6%.Thisbuildoutwillrequire80,000newelectriciansannuallybetweennowand2031,accordingtosomeestimates.Similarly,Franceisstrugglingtofindenoughnuclearspecialiststoachieveitsambitionofgettingsixnewnuclearreactorsupandrunningby2035,acornerstoneofthecountry’snet-zeroplans.Nosinglecompanycanaddressworkforcecapacityonitsown.Itrequirescollaborationacrossengineering,procurement,andconstructionfirms;projectowners;governments;universities;andtradegroups.Nosinglecompanycanaddressworkforcecapacityonitsown.Itrequirescollaborationacrossengineering,procurement,andconstructionfirms;projectowners;governments;universities;andtradegroups.Attheindividualcompanylevel,leadingfirmsdeeplyunderstandfuturetalentneedsandseekcreativesolutionstobringthattalentintothefold.44EnergyandNaturalResourcesReport2023Whilethoseexternalfactorsgenerallypresentthemostacutechallengesforcompanies,somearespeedingupdevelopmentprojectsthroughtheirownwaysofworking.Forward-lookingenergycompanieswithtraditionalapproachestomajorcapitalprojectsormergersandacquisitionsarestartingtotakeamoredynamicandflexibleapproachtodecisionmaking,enablingfasterlaunches.(ReadmoreintheBainBrief“EnergyTransition:DeliveringCapitalProjectsOnTimeandOnBudget.”)ScalingchallengeNo.2:UnlockingintegrationOvercomingsomeenergytransitionbarriersrequiresnewsystemcapacitybutnotnecessarilynewideas.ScalingsuccessinthiscategoryisakintoaphysicalformofITsystemsintegration.Examplesincludedigitaltoolsthathelpoptimizeenergygridstorageanddispatch,orbetterconnectingsupplyanddemandinindustrialclusters.Thisishappeningatamacrolevel,suchasinitiativesintegratingconsortiaandsupplychainstoprovidehydrogentomulti-industrybusinessclusters,aswellasatasmallerscale,suchasutilitycompaniesbuildingenergy-as-a-serviceplatformsforindustrialandotherenterprisecustomers.Policymakersandgovernmentsareuniquelypositionedtoactaslocalcatalystsforexpandingcapacityinburgeoningsupplychains.Thatcouldbeviadirectfunding,suchastheapproximately$7billioncommitmentfromtheUSRegionalCleanHydrogenHubsprogramtoestablish6to10domestichydrogenhubs,ortheEU’s€1billioninvestmentintheregion’shydrogenindustry.Meanwhile,somegovernmentsaretakingaleadershiproleconnectingcompanies,researchers,localauthorities,andcitizenstoidentifyandcarryoutsolutions.TheMissionInnovationHydrogenValleyPlatformcofoundedbytheEUisoneexample.However,findingthetalenttoleadintegrationsolutionsandstakeholdersisoftendifficult.Ratherthanexpertiseinfunctionaldisciplines—fromdigitalcapabilities,electricalsystemdesign,andjointventurenegotiationstonicheslikecustomers’offtakeandusagepatternsorelectrolyzermanufacturing—projectleadswhohavesignificant“techno-commercial”hybridskillstointegratealloftheseareas,orwhoaregreatatnurturingpartnerships,willbemorelikelytosucceed.Butpeoplewiththisskillsetarefewandfarbetween.Energyandnaturalresourcecompaniesmayhavetorecruitfromengineeringfirms,technologycompanies,government,orothercornersoftheindustry.Itdoesn’thelpthatmanypartsoftheenergyandnaturalresourceindustryarestrugglingtofindandkeeptalentanyway.Nearly40%ofexecutivesinour2023industrysurveysaidthey’rehavingtroublefindingdigitalandITtalent,aboutathirdreportdifficultyfindingtheengineerstheyneed,andaquarterarestrugglingtofindfrontlinelabor.Thisisforcingtraditionalenergycompaniestorethinkhowtheyhire,manage,andretaintalentedpeople.Alargeinternationalenergycompanyhasworkedtowidenitstalentpipelineandincreasediversitybytakingaskills-firstapproach.Itreevaluatedjobdescriptionstoremoverequirementsthatweren’tactuallycritical—forexample,consideringskillsdevelopedinotherindustries,recruitingatmoreschools,andconsideringawidersetofdegreemajors.45EnergyandNaturalResourcesReport2023ScalingchallengeNo.3:UnlockingventuringAcrucialpieceoftheenergytransitionwillbescalinguppromisingsubsectorsoftheenergysystemthatareearlystagebutgrowingfast:Thinkgreenhydrogenusecases,second-generationbiofuels,energystorage,CCUS,andbroadenergy-as-aserviceplatforms.Thesesubsectorswillpotentiallyachievescaleinthelate2020sor2030s.Theytypicallyhaveamixoftechnological,economic,policy,andcommercialuncertaintyreflectiveoftheirearlystage.Thisnextphaseofscalingthroughthemid-2020swilllikelydeterminetherolethatsomeofthesesolutionswillhaveinthefutureenergymix.Successasanearlyscalermaymakeorbreakcompetitiveadvantageforthe2030sandbeyond.Acrucialpieceoftheenergytransitionwillbescalinguppromisingsubsectorsoftheenergysystemthatareearlystagebutgrowingfast:Thinkgreenhydrogenusecases,second-generationbiofuels,energystorage,CCUS,andbroadenergy-as-aserviceplatforms.Theplaybookforgrowingastart-upapplieshere.Thepace,test-and-learncycleswithcustomers,andpartnershipsalltakeonanentrepreneurialflavor.Thisscalingchallengeisthereforemoreacuteforincumbentparticipantsintheenergysystem,whosehonedgrowthmusclesaredifferentfromwhat’srequiredbythecompetitivedynamicsoftheseemergentprofitpools.Onceagain,regulatoryincentivescancatalyzescalinginsomeofthesemarkets.Biofuelsmandatesacrosstheglobearepavingthewayformarketgrowth.Meanwhile,intheUS,theIRA’staxcreditshavetriggeredinvestmentgrowthingreenhydrogenproductionbymakingitinstantlycostcompetitivewithgray,andaDepartmentofEnergyloanguaranteeprogramsupportedthecommissioningoftheworld’slargesthydrogenstoragefacility.Nevertheless,thescalingbarriersforventuringtendtobemoreinternalthantheotherchallenges.Commercialexcellencewillbeessentialandmayrequiredevelopingnewmuscles.Findingpocketsofcustomerswillingtoformpartnershipsiscriticaltoensuredemandofftakeandastrongmarketposition.Furthermore,leadingcompanies’salesteamsareadeptatunderstandingcustomerneeds,creatingrisk-sharingarrangementsacrossmultipleparties,producttestingandlearning,collaborativesolution-engineering,andaccountmanagement.46EnergyandNaturalResourcesReport2023Attractingoutsidetalentisoftenakeytosuccess.Leadingcompaniesdon’thesitatetorethinktheirrecruitmentstrategyandvaluepropositionfornewhires.Waysofworkingmayalsoneedtochange.Engine2businessesoftenrelyonastrongoperatingmodelthatallowsforfasttestingandlearningcyclesandabiastowardpartnerships.ScalingchallengeNo.4:UnlockinginventionSomeenergytransitionsolutionsaresoearlyindevelopmentthey’llstillbenovelandfledglinginthe2030s,andtheymaynevercometofruition.ThisincludestechnologiesatvariousstagesofR&Dorearlycommercialtesting,suchasdirectaircapture,fusion,andconcentratedthermalstorage.Callthem“knownunknowns.”Othertechnologiesaresorawanduncertainthey’rebasically“unknownunknowns”atthisstage.Someenergytransitionsolutionsaresoearlyindevelopmentthey’llstillbenovelandfledglinginthe2030s,andtheymaynevercometofruition.ThisincludestechnologiesatvariousstagesofR&Dorearlycommercialtesting,suchasdirectaircapture,fusion,andconcentratedthermalstorage.TheworkofscalinguptheseinnovationsisbesttackledintheworldofR&D,labs,andvery-early-stagestart-ups.Governmentsplayanimportantrolehere,butsodoincumbentenergyandnaturalresourcecompanies.AccordingtoBainresearch,125ofthetopENRcompaniesbymarketcapitalizationineachsectorspentatleast$25billiononR&Din2022,morethanhalfoftheamountgovernmentsworldwideinvestedinenergytechnologyR&Dthatyear.AskingtherightquestionsIntheshortterm,companiesthatwishtoleadtheenergytransitionmustleadinscalinguptherequiredinfrastructureandsolutions.Asexecutivesdeveloptheirscalingstrategy,afewsimplequestionscanhelpthembringtherightsolutiontotherightproblem:47EnergyandNaturalResourcesReport2023•Whatscalingchallengesapplytoourcompany’senergytransitionopportunities?•Giventhat,whatareourtruebottlenecks,andwhatwillittaketounlockthem?What’sthatworthtous?•Willourcurrentcapabilitiessufficetoovercomeourscalingchallenges,ordoweneedtobuildnewonesorformpartnershipstofillgaps?•Whatrolecouldpolicyplayincatalyzingourscaling,andwhatrolecanweplayincatalyzingpolicy?48Full-PotentialAgendaFourImperativesforBuildingResilienceinEnergyandNaturalResourcesThetraditionalfocusonnear-termrisksleavescompaniesvulnerabletolong-termchallenges.ByDavidKnipe,EricBeranger-Fenouillet,AadarshBaijal,EthanPhillips,andMarthaEggenbergerAtaGlanceTraditionalapproachestoresiliencefocusonnear-termrisks,exposingcompaniestothethreatsoflong-termchallenges.Theseblindspotscanleaveexecutivesoverconfidentabouttheircompanies’resilience,whenmosthaveyettobetested.Leaderstakeabroadapproachthatincludesstrategic,operational,andsupplychainresilience,inadditiontomanagingtheenvironmentalriskstophysicalassets.49EnergyandNaturalResourcesReport2023Wearelivingthroughoneofthemostvolatileanduncertainperiodstheworldhasseenforsometime.WarcontinuesintoasecondyearinUkrainewhilenationscontinuetorecoverfromtheCovidpandemic.Atthesametime,theeffectsofclimatechangearematerializingstrongerandmoreoftenthanbefore,astheworldinchestowardnet-zerocarbonemissions.Theneedforresiliencehasneverbeenmoreurgentforboardsandexecutiveteams,andresilienceislikelytobeoneofthemostcriticalstrategicdifferentiatorsofacompany’ssuccess.Buttraditionalcorporateapproachestoresiliencedon’trisetotoday’schallenges.Theyfocustoomuchonnear-termrisks,withoutfullyrecognizingthepotentialimpactsupanddownthevaluechain,wellbeyondindividualcompanyboundaries.Theyusuallymakeverylimiteduseofadvancedpredictivetools,whichcouldhelpidentifysomeofthoserisks.Andtheyfailtoconnectriskstotheorganization’slong-termstrategicgoalsandeconomicmodel.Thesenarrowapproachescanleaveblindspotsandcreateafalsesenseofsecurity.Bainrecentlyaskedexecutivesabouttheirconfidenceinnavigatingfivetypesofthreats,spanningfromthephysicaleffectsofclimatechangethroughtotechnologicalvulnerabilities,inputshortages,andbottlenecks(seeFigure1).Confidenceacrosstheboardappearssurprisinglyhigh,especiallyasmanyofthesethreatscontinuetoescalate.Figure1:NearlyallexecutivessaidtheywereveryorsomewhatconfidentintheirabilitytomanagethephysicaleffectsofclimatechangeVeryconfidentSomewhatconfidentNotatallconfidentPhysicaleffectsofclimatechangeFinancialinstabilityGeopoliticalrealignmentTechnologicalvulnerabilityInputshortagesandbottlenecks20406080100%0Source:BainENRTransitionSurvey2023(n=608)50EnergyandNaturalResourcesReport2023Thesehighnumberscouldreflectanoverconfidencethat’snotentirelyjustifiedbythelimitedinvestmentsmostfirmsaremakinginresilience.Peopleoftenfailtoaccuratelyassessthemagnitudeandlikelihoodofrareevents,suchasthephysicaleffectsofclimatechange,sincemosthavenotexperiencedthemfirsthand.Leadingcompaniestakeamorecomprehensiveapproachthatincludesstrategic,operational,andsupplychainresilience,inadditiontomanagingtheenvironmentalriskstophysicalassets.StrategicresilienceAllstrategyisformedamidsomelevelofuncertainty,butthechangesinherentintheenergytransitionmultiplythedifficulty.Uncertaintycanhandicapafirminseveralways.Overconfidencecanleadtocorporatemyopia;under-confidencecanleavefirmsinparalysis.Eitherscenariocanstallactionuntilit’stoolatetopreventabadoutcome.“Existingassetsarevulnerabletotheinstabilitiesultimatelycausedbyclimatechangeandshortageofresources.”—Vicepresident,newenergycompany,EuropeIt’srarethatthelosersinatransformingindustryarereallyblindsidedbychange.Moreoften,theyfailtosetastrategicdirectionthatcanadapttoshiftingconditions.Leadingfirmsstartwithaviewofthefuture:Whatwillcustomersneed30yearsout?Thisapproachcanhelpcompaniessetalong-termvision,freefromtheconstraintsofcurrentpracticesandportfolios.Successfulteamsthenplanfortheirlong-termreferencecase,whilecontinuouslymonitoringtheenvironmentandcorrectingcourseasnecessaryalongtheway.Evenamongcompaniesthatinvestinlong-termscenarioplanning,fewconsiderthe“cornerscenarios”—eventsthatarepossiblebutmuchlesslikely,likeunexpectedpolicyshocksorlosingaccesstocapitalmarkets.Plannersoftenshelvethesescenariosbecausetheydon’twanttoinvesttimedevelopingdetailedplansforconditionsthatareunlikelytooccur.Butignoringhigh-riskscenariosis,increasingly,ashort-sightedstrategy.Thetumultofrecentyearsmakesitclearthattheenergyandnaturalresourcetransitionislikelytobecomemoredisorderly,evenchaotic.Stresstestingacompany’scapabilitieshasneverbeenmoreessential,andit’soneofthewaysthatplannerscanlocatetheextremecorners,inordertounderstandtheimplicationsandpotentialopportunitiesoflow-probability,high-riskscenarios.51EnergyandNaturalResourcesReport2023OperationalresilienceReducingScope1and2emissionshelpsensurelong-termcommercialviabilityinseveralways.First,itpositionsacompanytobeclosertocomplianceasregulationsorcarbontaxesincrease.Closelyrelated,ithelpspreserveanasset’ssociallicensetooperate,makingitlesssusceptibletobeingtargetedasasignificantcarbonemitter.Itcanalsoextendtheworkinglifespanoftheasset,givenupdatesthatrenewoperationalcapability.Reducingemissionssignalsallofthesebenefitstoinvestorswhoareconsideringthelong-termviabilityofbusinessesinarapidlychangingenergysector.Inadditiontoensuringresilienceforoperations,companiesalsohavetoensurethattheirdecarbonizationprogramsareresilientandcanadapttochangingconditions.Inthiscontext,resiliencemeanstheabilitytoperseverenotonlythroughextremeweathereventsbutalsoeconomicdownturns,changesintechnology,andotherunpredictablebarriers.Somecompaniesaremovingquicklytogainfront-runnerstatuswhileothersaretakingawait-and-seeapproach,aimingtotakeadvantageofmoreefficienttechnologiesandeconomiesofscale.“Theavailabilityofaskilledworkforceandovercomingkeysupplychainbottlenecksarecriticaltothetransition.”—Vicepresident,utilitiescompany,EuropeSupplychainresilienceOncethepurviewoftheCOOandpurchasingfunctions,supplychainresiliencehasrisentothehighestlevelsofthecorporateagendaoverthepastfewyears.Thepandemic,asemiconductorshortage,andwarinUkraineareamongthecrisesthathaveexposedvulnerablesupplychains.Qualityandpricearestilltablestakes,butincreasinglysupplychainexecutivesareinvestingtoimproveflexibilityandresilience(seeFigure2).“Acriticalissuetothetransitionisthatsupplychainsarehighlyconcentrated,increasingvulnerabilitytodisruptions.”—Vicepresident,powerutility,NorthAmericaSupplychainresiliencemeansdifferentthingsacrossthesector,butingeneralit’stheabilitytoproactivelyminimizerisk,absorbinevitableshocks,andquicklyrecoverfromsetbackstolessentheimpactonoperations.Takingaholisticviewoftheentirechaincanhelpcompaniesidentifythemostimportantriskstothebusinessandthenassessthelikelihoodofeach.Comparingstrengthstocompetitors’canhelpcompaniesfindopportunitiestodifferentiatewhilemitigatingtheirimpactsonenergymarketsandtheenvironment.52EnergyandNaturalResourcesReport2023Figure2:FlexibilityandresiliencearebecomingmoreimportanttosupplychainexecutivesSupplychaininvestmentgoals,lastthreeyearsvs.nextthreeyears(percentageofrespondentswhoselectedeachgoalasatop-threeprimaryobjective)50%50%40%39%30%33%21%23%21%24%12%11%12%15%IncreaseIncreaseReducecostIncreaseEmbeddigitalSustainabilityNewproducts/flexibilityresiliencespeedandtechservicesLastthreeyearsNextthreeyearsSource:BainSupplyChainIndustryResilienceSurvey,September2022(n=275)PhysicalresilienceManycompaniesarealreadyexperiencingtheeffectsofclimatechangeontheiroperations.Forexample,in2022,AppleandIntelsufferedaweeklongshutdownofsomeproductionfacilitiesinSichuan,China,whereadroughtstalledmultiplehydropowerplants.Butmanybusinessesunderestimatethelikelihoodofphysicalclimateriskeventsandtheirexposuretothem,relyingonanarrowsetofrisk-transfertools(forexample,insuranceorfinancialhedges)ratherthanabroadersetofstrategicandoperationalleversforbuildingresilience.“Itisimperativethatclimatechangeadaptationeffortsbeputtothefore.Riskmanagementandbusinesscontinuitypracticesshouldbeinplacetoensurestabilityofservices.”—Seniormanager,utilitiescompany,Asia-PacificPowerutilitySouthernCaliforniaEdison,forexample,hasbeenworkingformorethanadecadetomanagetheeffectsofclimatechangeonitspowergridandgenerationassets,whichincludemore53EnergyandNaturalResourcesReport2023frequentwildfiresanddroughtsthatjeopardizetheviabilityofhydroelectricpower.Toaddresstheserisks,SCEembarkedonadetailedassessmentofclimateriskstoitsassets,operations,andservicesacrossits50,000-square-mileservicearea.TheresultshelpedSCEreprioritizecapitalinvestmentsfornewinfrastructurethatcanwithstandmoreintensefloodingandstorms,extremetemperatures,andmoreseverewildfires.SCEsaysitinvestsabout$5billioneachyeartomaintainandimproveitsgrid,andthatbytheendof2021ithadreducedwildfireriskbyabout70%comparedwithpre-2018expectations.Amoreproactiveapproachtoresiliencestartswithasystemiclookacrosstheentirevaluechain,usinganalyticaltoolstoestimateriskstodayandinthefuture.Companiescanthenfocusonpracticalactionstoadapttotheserisksandmakedecisionsaboutwhichassetsorfacilitiestoprotectandwhatstrategicchangesmaybenecessarytosurviveandthrive.Thechangesmayincluderevisingcapitalplanningprocesses,restructuringornearshoringthesupplychain,oradvocatingfornewpolicysolutions.54Full-PotentialAgendaTheEnergyTransition’sOtherBigPuzzle:MakingtheMathWorkStronginvestmentreturnsarewithinreachforcompaniesthatfocusonthefundamentalsandaren’tafraidtogetcreative.ByGrantDougans,AndersBruhn,DaltonMaine,ValeriaSterpos,FrancescoCigala,andShazrulAsariAtaGlanceTheenergytransitionwouldgenerateatleast$55billioninnewearningseachyeariftheworldapproachedtheannualinvestmentlevelrequiredfornetzero.Unlockingthetrillionsofcapitaldollarsavailableremainsdifficult;manycompaniesstruggletochartclearpathwaystoinvestmentreturnsontheirlow-carbonprojects.Leadingcompaniesareusingpolicy,commercialcapabilities,creativefinancing,costdiscipline,andotherstrategiestomakethemathworkfortheirlow-carboninvestments.55EnergyandNaturalResourcesReport2023Deliveringontheenergytransition’sambitionscomesdowntoeconomics:Howcantheworldmakethe$4.6trillionannualinvestmentrequiredfornetzeropencilout?AsinvestorsandotherstakeholdersformglobalcoalitionssuchastheGlasgowFinancialAllianceforNetZero(GFANZ),there’snoquestionthattherearetrillionsofcapitalinvestmentdollarsworldwidelookingforahomeinlow-carbonenergysystems.Capitalseeksreturns.Iflow-carboncapitalinvestmentsapproachedtheannual$4.6trillionthattheInternationalEnergyAgency(IEA)estimatesisrequiredby2030toachievenet-zerocarbonemissionsby2050,theenergytransitionwouldgenerateanew$55billionearningspooleachyear—alow-endestimateifoneassumesanaverage20%equityweightingforprojectsanda6%returnonthatequity.That’sthegenerationalupsidethatsomanycompaniesarepursuingaroundtheworldastheyworktoscaleuptheirnewenergy-relatedbusinesses.Despitetheopportunity,lessthan$2trillionperyearisbeingdeployedintocleanenergyworldwideacrosstheprivateandpublicsectors,accordingtoIEAdata.InBain’s2023surveyofmorethan600energyandnaturalresource(ENR)executives,respondentsconfirmedthattheyexpecttoallocateonlyabout25%oftotalcapitaltonewlow-carbongrowthareas.Thisislargelyunchangedfromlastyear’ssurveyandconsistentwiththecapitalallocationdatasourcedthroughBain’sanalysisof125ofthetopenergyandnaturalresourcecompaniesbymarketcapitalizationineachsector.What’smore,accordingtothatsamedata,almosthalfoftheenormouscashwindfallthosecompaniesreceivedoverthelasttwoyearswasreturnedtoshareholdersratherthanreinvestedintonewlow-carbonprojects.Althoughthechallengesaremultifacetedandcomplex,ENRexecutivessaidinour2023surveythatthemostformidableconstraintonscalinguplow-carbonsystemsisn’taccesstocapitalorevensupplychainchallenges—it’ssecuringsufficientreturnsoninvestmentandcustomerwillingnesstopayhigherpricestocoverthatcapital,oncedeployed.What’sgoingon?Althoughthechallengesaremultifacetedandcomplex,ENRexecutivessaidinour2023surveythatthemostformidableconstraintonscalinguplow-carbonsystemsisn’taccesstocapitalorevensupplychainchallenges—it’ssecuringsufficientreturnsoninvestmentandcustomerwillingnesstopayhigherpricestocoverthatcapital,oncedeployed(seeFigure1).Putanotherway,mostcompanieshaveampleaccesstocapitalmarkets.It’scustomerrevenuethey’rehuntinginordertogrowthesebusinessesbyanorderofmagnitudeincomingyears.Untilthatproblemissolved,the$4.6trillionglobalinvestmentgoalwillremainoutofreach.56EnergyandNaturalResourcesReport2023Figure1:Executivessaythegreatestobstaclestoscalinglow-carbonbusinessesarecustomers’unwillingnesstopayhigherpricesandthedifficultyofensuringadequatereturnsoninvestmentShareofexecutiveswhoconsidereachfactortobeaverysignificantroadblocktoscalingtheirlow-carbongrowthbusinesses60%40200GovernmentLackofLackofSupplychainLackofLackofboldCulturalpolicyandorganizationalexperience/constraintscash/capitalambition/resistanceROI/customerregulationstalentinnewwithinthewillingnesscapabilitysupportfromcompanytopayforscalingbusinesscompanyatspeedareasleadershipSource:BainENRTransitionSurvey2023(n=608)UnderstandingthemathofcapitalformationTheenergyandnaturalresourceindustriesareexceptionallycapitalintensive,astheirexecutivesandinvestorsknowalltoowell.Formanylow-carbonprojects,thelargestinputcostiscapital.Putsimply,foranyprojecttobebuilt,capitalprovidersmustfirstaskandanswerthequestions,“whowillpay?forhowlong?”and“isthatenough?”Mostcapitalallocatorswillbehesitanttoinvestbeforethereareclearsignalsthatdemandwillbethereandreturnswillfollow.Togiveaclearerpictureofthemathsurroundingcapitalformation,asimpleruleofthumbisthatforevery$1billionincapitalinvestedinalow-carbonproject,roughly$60millioninrevenuemustbecollectedtocoverreturnsonequity,debtservicingcosts,andtaxes,assumingalow-riskassetwitha5%costofcapital.Thatassetmustalsobedepreciated,increasingtherevenuerequiredtoabout$108millionperyear,assuminga20-yearusefullife.Ifriskincreases,andwithitcostofcapital,therevenuethatmustbecollectedfromcustomersgrowsfurther:Forevery500basispointsincreaseinthecostofcapital,theannualrevenuerequirementincreasesbyalmost$55million(seeFigure2).So,ascentralbanksincreaseinterestrates,theeffectivecostofanygivenlow-carbonprojectincreasesaswell.Ata10%averagecostofcapital,every$1billionincapitaldeployedrequiresabout57EnergyandNaturalResourcesReport2023Figure2:Atleast$108millioninannualrevenueisrequiredtoform$1billionincapitalforalow-riskassetAnnualrevenuerequired($M)(capitalonly,excludingoperations)+54300270+54Tax+54216Equityreturns200162108Costofdebt100Depreciation010%15%20%5%WeightedaveragecostofcapitalNotes:Calculationsassume75/25debt-equityprojectsplitwith600basispointsspreadbetweendebtandequityreturns,a20-yearstraight-linedepreciationschedule,anda25%averagecorporatetaxrate;valuesareroundedSource:Bainanalysis$160millioninrevenuefromcustomerseachyear.Furthermore,allofthesecostscomebeforeoperatingandfuelexpenses.Thetroubleisthatalthoughconsumersareconcernedaboutclimatechange,datasuggeststhattheymaynotbewillingtopayhigherbillstohelpcombatit.RecentBainsurveysfoundthatlessthanhalfofUSandEUconsumersarewillingtopayevenasmallincreaseintheirresidentialelectricbillorfuelpricetoreduceemissions.Instead,theypreferraisingtaxesonwealthyhouseholds,suggestingthatconsumersbelievegovernmentshouldintervenetobringdownpricesofnewtechnologies(seeFigure3).Forlow-carbonprojectsservingbusinesscustomers,suchassustainableaviationfuel(SAF)orchemicals,generatingrevenuerequiresfindingacounterpartywillingtopayapremiumabovethecostoflegacyproductsandtoprovidelonger-termrevenuecertainty.Butaswediscussinourbriefaboutanet-zeropathforcommercialaviation,theSAFpremiumcanbesignificant.Furtherbarrierstocapitalformationandattractivereturnscanemergebasedonanindividualcompany’sfinancialmodelandinvestorvalueproposition.Acrossenergyandnaturalresourcesectors,differentcompanieshavedifferentinvestorvaluepropositions,withdifferentimpliedbalancesof58EnergyandNaturalResourcesReport2023Figure3:Mostconsumersaren'twillingtopayhigherpricesforreducinggreenhousegasemissionsPercentageofrespondentsEuropeUS2%monthlyincreaseinresidentialelectricbills10%monthlyincreaseinresidentialelectricbills50%monthlyincreaseinresidentialelectricbills20406080100%020406080100%Increasingthefueldutyby10centsperliter(38centspergallon)Increasingthefueldutyby25centsperliter(95centspergallon)Raisingtaxesonwealthyhouseholds0SupportOpposeSources:BainUSConsumerPulseSurvey,poweredbyDynata,February2023(n=2,496);BainEMEAConsumerPulseSurvey,poweredbyDynata,Wave7,February2023(n=12,585)growth,risk,andreturn.Utilitiesinvestorsgenerallyseeklow-risk,comparativelylower-return,assetdeployment—abusinessmodelakintoabankfinancingmortgages.Bycontrast,oilandgasinvestorsunderstandthattheirsector’sstocksaresubjecttolargeswingsinreturnsasenergypricesmove.They’recomfortablewiththataddedriskbecauseit’sworthittothemtopursuehigherreturns(alongwithdividendpayments),withpotentiallyfastorlumpypaybackperiodsbasedoncommoditycycles.Autilityinvestorwouldlikelybeuncomfortableifaskedtofinanceaperfectlyeconomicbutrisky(high-return)project,whichiswhyUSutilitieshavecontinuedtoshednon-regulatedassetsoverthelastdecade.Therewouldbesimilarchallengeswhenaskinganoilandgasinvestortofinancerenewablesprojectswithlowerriskandlowerreturnoncapexthantheexistingbaseportfolio.Bothtypesofprojectsmaybeperfectlyviable,butdifferentinvestorswouldvaluethoserisk/returnprofilesdifferently.Tactically,acompany’scapitalallocationandapprovalsprocedurescanalsoposeachallenge.Existingcapitalallocationprocessesmaynotbesetuptoeffectivelyhandlelow-carbonprojects’novel(fromthestandpointofthelegacycompany)risk/returnprofiles.Somethingassimpleashowaproject’scapitalcommitteetemplateissetup—andthedifferencesinthattemplate’sunderlyingassumptionscomparedwithatypicalproject—canmakeprojectapprovalsdifficulttosecure.59EnergyandNaturalResourcesReport2023PracticalsolutionsforexecutivesInourexperienceworkingwithenergyandnaturalresourcecompaniesworldwide,focusingononeormoreofthestrategiesbelowcanbolsterthecaseforcapitalallocationsandincreaseaproject’sreturnoninvestment.Opennewmarketsviapolicy.Inmanycases,puremarketeconomicswillbeinsufficienttocreatelow-carbonrevenueatthenecessaryscaleorpace.Policies—includingsubsidies,taxes,anddemand-sideregulationsrequiringindustriestousethesenewenergies—willberequired.Atleadingcompanies,managementteamsworkwithabroadrangeofstakeholderstousepolicytocarveoutdemandandassociatedrevenues.Thosethatproactivelyshapepolicyandstakeholderlandscapeswillgenerateoutsizereturnsandbettermanagerisks,whilehelpingsecurecorporatedecarbonizationcommitments.Policy’sfinancialupsideforenergycompaniescanbestartling.USagri-techcompanyGreenPlainsissimultaneouslyacceleratingitsdecarbonizationplanswhilegeneratingshareholderreturns.It’smakingoptimaluseoftaxcreditsofferedbytheUSInflationReductionAct(IRA)forcarboncapture,utilization,andsequestration(CCUS)andcarbonintensityreduction,aswellascarboncreditsofferedbyvariousNorthAmericangovernments.Asaresult,thecompanyintendstomorethanhalvethecarbonintensityofitsethanolproductionplatformwhiledeliveringaconservativelyestimatedannualizedprofitincreaseof$200millionto$280millioninEBITDAby2027overanestimated1billiongallonsofethanolproduction.ThisisoneofmanyrecentexamplesintheUnitedStatesfollowingtheIRA’spassage.Inourexperienceworkingwithenergyandnaturalresourcecompaniesworldwide,focusingononeormoreofthesestrategiescanbolsterthecaseforcapitalallocationsandincreaseaproject’sreturnoninvestment.Neste,abiofuelsproducerbasedinFinland,hashadanactivepresenceinclimateconversationsduringcrucialpolicy-shapingmoments.Thecompanyprovidesinsightsandanalysison,forexample,emissionreductiontargetsandrenewabletransportationfuelsthroughpublicconsultationsanddirectengagementwithgovernmentofficialsandpoliticians.Nestealsoparticipatesinindustryassociationsthatoftenhaveaninstrumentalroleininforminggovernmentpolicy.60EnergyandNaturalResourcesReport2023Buildcommercialmusclesandmindsets.Leadingcompaniesalsofocusondevelopingpocketsofcustomerswhoarewillingtocommittotheirlow-carbonproductorservice,oftenleveraginggovernmentincentives.Thisrequiresadeepcustomer-facingcommercialcapabilitythatformanytraditionalenergyandresourcecompaniesisanewmuscle.Examiningpotentialcustomers’environmentalactivitiesandcommitmentscansignalwhetherthosecustomersmightbewillingtopayagreenpremium.Onerenewableenergycompanydevelopingacleanhydrogenprojectstartedwithalistofthousandsofpotentialcustomersinitsmostattractivesegmentsandnarroweditdowntothe40mostlikelycustomers.Thatallowedittofocusitssaleseffortsontargetedconversationsthatresultedinanofftakeagreementthatmadetheprojecteconomicallyviable.Inthebiochemicalssector,GenomaticafoundanearlypartnerinLululemontobringtomarketplant-basednylonthatdoesn’trelyonpetrochemicals.(Formoreexamplesofcommercialexcellenceintheenergyandnaturalresourcetransition,seeourbriefs“UnlockingHydrogenProjectswithaCustomer-CentricApproach”and“FindingtheSustainableAdvantageinChemicals.”)Toooften,companiesassumealllow-carbonprojectsshouldbefinancedbythecorporatebalancesheet,whereinvestorsmaynotappropriatelyvaluetherisk/returnprofileoftheproposedinvestment.Creativefinancingsolutionscanbridgethegap.Inanotherexample,utilitiesareincreasinglyconsideringhowtoreframebillstocustomers.Forexample,oneutilityiscontemplatingaddingtoeachcustomerbilltheeffectivegasolinesavingsassociatedwithcharginganelectricvehicle(EV)athome.EVchargingdrivesupelectricitybills,buttakinga“totalenergywallet”viewandtalkingwithcustomersabouttherelatedgasolinesavingscanhelpconsumersmorewillinglyaccepthigherutilityprices.Thiswouldbenaturaltomanyotherindustries,butforutilities,itrepresentsanewmindset.Keepcostsdown.Atraditionalapproachtomakingthemathworkcanalsobecrucialinlow-carbontechnologiesandmarkets:Becomealow-cost,scaleleader.Businessesthatgrowlargeenoughcanreceiveadvantagedaccesstokeycomponentsatthelowestcosts,therebyfreeinguproomforgrowth.Forcompanieslikeutilities,whichcollectrevenuefromcustomersonanaveragechargebasis,eliminatingcostscanhelpfundlow-carboninvestments.61EnergyandNaturalResourcesReport2023Findcreativefinancingsolutionsandreducethecostofcapital.Allthingsbeingequal,giventheamountofglobalcapitalchasinglow-carbonopportunities,low-costcapitalshouldbeavailableforanyfeasibleproject.Butcompaniesoftenoverlookcreativebalancesheetoptionstomaximizereturnsfortheirshareholdersandsecurebetterinfrastructurefinancing.Toooften,companiesassumealllow-carbonprojectsshouldbefinancedbythecorporatebalancesheet,whereinvestorsmaynotappropriatelyvaluetherisk/returnprofileoftheproposedinvestment.Creativefinancingsolutionscanbridgethegap.Intheoffshorewindindustry,forexample,complexfarm-downschemesareawell-establishedpracticetolowertheproject’seffectivecostofcapitalandgeneratereturnsforthedeveloper.Leadingcompaniesseriouslyconsideralternatives,suchastakingadevelopmentfeeandtransferringtheassettoanotheradvantagedsourceofcapital,loweringoverallprojectcosts.Takingamoreactiveapproachtopursuingpartnershipswithinvestorscouldalsoprovevaluable.Forexample,oilandgascompaniescouldcoinvestwithinfrastructurefundsonlower-risk,lower-returnprojects;withdevelopmentbanksforprojectsinemergingmarkets;orwithprivatecapitalinvestorswillingtotakeonriskier,longer-termprojects.StartwiththesoundstrategyTherearemanysuccessfullow-carbonbusinessesalreadyincreasingrevenueandgeneratingstrongreturns.Eachyear,renewablesdeploymentisgrowing,with2022seeingarecordnetadditionofmorethan250gigawattsofwindandsolarcapacity.Thatsaid,foreverycompanyachievingleadingreturnsandgrowth,thereisanotherstruggling,asoursurveyresultsshow.Therearemanysuccessfullow-carbonbusinessesalreadyincreasingrevenueandgeneratingstrongreturns.Eachyear,renewablesdeploymentisgrowing,with2022seeingarecordnetadditionofmorethan250gigawattsofwindandsolarcapacity.Developingaclearstrategythatdirectlyaddressesthefundamentalsofreturngenerationinlow-carbonmarketsiscritical.Withover$150trillionininvestorcapitalcommittedtowardnet-zerotargetsbyGFANZalone,being“justanotherproviderofcapital”isn’tarecipeforattractivereturns.Energyandnaturalresourcecompanieshaverealcompetitiveadvantagesagainstpure-playcapital62EnergyandNaturalResourcesReport2023providers,buttheyneedtherightcapabilitiestoexploitthoseadvantagesandgeneratereturns.Policy,commercialcapabilities,creativefinancing,andcostdisciplineareastartinglistoftoolsforsupportingcapitalformation;thereareothers.Whiletheglobalpictureoftheenergytransitioniscomplex,companiesthatareproactive,bold,andfocusedonthefundamentalsofreturngenerationwillbeabletoovercomeoneofthemostcommonchallengestoscalingalow-carbonbusiness.They’llalsohelpmovetheworldclosertoits$4.6trilliongoal,oneprojectatatime.63EnergyandNaturalResourcesReport202364Boldideas.Boldteams.Extraordinaryresults.Bain&Companyisaglobalconsultancythathelpstheworld’smostambitiouschangemakersdefinethefuture.Across65citiesin40countries,weworkalongsideourclientsasoneteamwithasharedambitiontoachieveextraordinaryresults,outperformthecompetition,andredefineindustries.Wecomplementourtailored,integratedexpertisewithavibrantecosystemofdigitalinnovatorstodeliverbetter,faster,andmoreenduringoutcomes.Our10-yearcommitmenttoinvestmorethan$1billioninprobonoservicesbringsourtalent,expertise,andinsighttoorganizationstacklingtoday’surgentchallengesineducation,racialequity,socialjustice,economicdevelopment,andtheenvironment.WeearnedaplatinumratingfromEcoVadis,theleadingplatformforenvironmental,social,andethicalperformanceratingsforglobalsupplychains,puttingusinthetop1%ofallcompanies.Sinceourfoundingin1973,wehavemeasuredoursuccessbythesuccessofourclients,andweproudlymaintainthehighestlevelofclientadvocacyintheindustry.Formoreinformation,visitwww.bain.com

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