The Changing Role Of Downstream Oil Companies In The Energy Transition

2020 proved to be a major turning point in the energy transition. Government and industry alike joined hands in pledging net-zero targets, and the International Energy Agency’s declared that “solar PV is now the cheapest source of electricity in history.” These pledges combined with solar power generation’s economic competitiveness underpins the momentum that has been gathering for years behind solar technology. Companies transitioning away from a focus on downstream oil are well placed to capture this momentum by leveraging their risk management expertise to deliver multi-scalar projects in high-potential markets. This pivot to deliver low carbon, distributed energy solutions to their customers utilizing solar and its associated technologies such as battery storage allows them to play an important role in the energy transition.

Whilst much has been made of the growing scale of solar facilities and decreasing Levelized Cost of Electricity achieved for tendered on-grid solutions in developed solar markets, improving solar technology allows downstream oil companies to deliver the economic and energy access benefits to those who most need it, including the 789m currently living without access to electricity. This is because they benefit from a geographical presence across multiple jurisdictions unrivaled by many other industries helping to direct financing flows to projects delivering the best double bottom-line returns.

"Downstream oil companies are well placed to support the Energy Transition but this will entail transitioning themselves and leveraging their various expertise to deliver multi-scalar projects in high-potential markets"

The strong relationships downstream oil companies have with customers allows them to educate Commercial &Industrial as well as retail customers on the benefits of solar technology and tailor solutions to their specific needs. For behind the meter prosumers, these benefits include improved reliability, cost savings and reduced carbon emissions. The downstream sector’s customer expertise, including managing counterparty risk, provides investors the security required to distribute capital and finance renewable projects. This is particularly so in jurisdictions perceived by investors to be more risky; often those same countries that have the highest levels of energy poverty.

The geographic platform combined with internal expertise and existing financial relationships means downstream oil and gas companies present in energy-poor geographies are presented with an excellent opportunity to utilize solar technology and deliver the United Nations Sustainable Development Goal 7: Affordable and Clean Energy. As technology continues to improve, costs continue to decline, and commitments to address climate change grow downstream, oil companies have the opportunity and responsibility to energize their communities through the energy transition. However, there are barriers to overcome:

1. Governments of countries with low levels of electrification must create an enabling environment for solar to be able to compete on an even footing with thermal power generation. This means setting up transparent and well-functioning markets to encourage participation and investment. Key lessons from geographically comparative markets with a history of successful solar implementation include:
   1. Amending or introducing regulations that liberalize and deregulate monopolistic power generators
   2. Allowing Independent Power Producers to build, own and operate electricity generation facilities
   3. Allowing counter parties to enter into Commercial Power Purchasing Agreements
   4. Implementing suitable Feed-in-Tariff and Net-Metering policies that encourage investment in power generation
   5. Ending fossil fuel subsidies, including for thermal power generation
   6. Simplifying Tax Law
   7. Implementing a carbon tax or carbon trading system
   8. Supporting green job growth via reskilling of the workforce towards electrification
2. Countries with low on-grid penetration will also have to embrace new and experimental configurations involving decentralized, mini and micro solar grids. Unique geopolitical and structural attributes mean that these countries have to remain agile and open to cross-sectoral cooperation between national utility and private providers, allowing for disruptive or leapfrogged modes such as Pay As You Go technology or rebates for costs saved to forgo the large centralized transmissions networks. Such models are particularly relevant for sub-Saharan Africa.
3. Downstream Oil companies must transform and reinvent themselves. They are transitioning alongside their customers to become energy solutions providers focused on decarbonizing supply chains whilst increasing access to affordable, reliable, and sustainable energy. No less than their social license to operate is at stake whilst their traditional business faces increasing costs for compliance and corporate social responsibility. This transformation should prove easier for downstream oil companies that do not carry the legacy of upstream fossil fuel production.
4. Talent must be attracted and retained. Existing workforces need to be reskilled to work in kWh rather than bbls, liters, or gallons and re-energized to deliver beneficial solutions. As energy production, distribution and storage become increasingly digitized, distributed, and decarbonized, the sector must attract the brightest talent to tackle one of the world’s great problems. This should largely market itself—would world’s engineers rather work on delivering clean, safe, and reliable electricity to the world or touching up the like button of a new app? Nevertheless, it falls back to the need to reinvent themselves in order to do so.
5. Educating Commercial & Industrial customers that solar technology along with battery storage can provide a complete and cost-competitive solution versus their alternatives such as kerosene lamps and diesel generators.

Downstream Oil Companies are uniquely positioned to support the energy transition. By working with the government, regulators, utilities, and customers, they can overcome the barriers that are in place. By leveraging the momentum behind solar technology, utilizing their relationships with customers, and championing the energy transition, they can energize their communities, helping deliver the UN’s SDG 7 by increasing access to clean, safe, affordable, and reliable electricity.