Historically, our energy system has been relatively homogenous. That is to say, the world needed energy and most of that was supplied by hydrocarbons. Moving forward, as the world accelerates its push to decarbonization, we will shift to a more heterogeneous approach that takes different energy sources and the energy demand of different regions into consideration.
Country regulations, technological advancements and investor pressure are just some of the factors that will drive even greater heterogeneity in the energy market over the next decade. Arguably, consumer demand and changing preferences will have the biggest impact and create a unique demand-driven transition that isn’t purely impacted by cost of supply, but also by consumer choice and a willingness to pay for low-carbon energy services products.
The primacy of capital allocations for energy portfolios
To compete in the energy future, companies across the value chain will need to understand market-by-market demand dynamics. They will also need to have granular visibility into returns on their capital allocations. Only then can they effectively adjust their asset portfolios to the most economical plays, while also offering the supply sources that tomorrow’s energy consumers seek.
This is new territory for many players. While the industry has accepted that carbon abatement programs or digital transformation affect the entire enterprise—from back-office operations to corporate culture—they haven’t paid the same attention to capital allocations and portfolio rebalancing. Tools have been introduced to accelerate calculations; but few changes to the capital-allocation approach have been made. In a heterogeneous energy system, old methods of allocating capital won’t work. Companies must look at the entire energy system, not just a limited set of variables. And they need to assess the profitability (vs. the cost-effectiveness) of asset classes (vs. assets only). To do that, they must be able to compare different segregated asset classes on common metrics: Joules (J) and dollars (USD).
The Accenture Energy System Model
This radical shift in thinking gives rise to the Accenture Energy System Model, a portfolio evaluation methodology that is analytics-based and scenario-driven. The methodology looks at two metrics—profitability per joule (USD/J) and capital turnover or joule delivered per unit of capital (J/USD)—to weigh asset investments on their absolute value creation. These metrics are particularly valuable because they encompass all of the variables that the converging energy system of the future introduces.
VIEW ENLARGED IMAGE
When these two metrics are multiplied, they provide the return on invested capital (ROIC) of that particular asset class. While it has been common to compare different business models using this method, we believe it should take center stage in modeling energy portfolios going forward. There are three reasons:
It enables a like-for-like comparison of different asset classes and energy sources, thereby providing insights into the level of optionality that is possible.
It ensures a focus on capital returns, which is top of mind for investors.
It enables companies to incorporate fluctuating variable such as subsidies, taxes and product premiums into their value assessments.
Only the start of the energy transition
Leading in the energy transition requires not only optimizing capital allocation and portfolios, but also infusing performance excellence throughout the company’s day-to-day operations. To manage operational complexity and operational expenditures, companies must equip their key decision makers with a modern and powerful decision platform—one that allows the correlation of these variables in real-time and the discovery of new trade-offs to optimize margins.
Why? Because allocating capital to the right assets is just one part of the equation. Equally important is ensuring that those allocations generate high returns over time and value across different variables. Only by combining both capital allocation and operational decision platforms can energy companies navigate the transition with confidence and emerge stronger in the energy system of the future.