The energy transition is no longer a linear shift from fossil fuels to renewables. It’s a sprawling, interdependent evolution with new risks and investment opportunities at every turn. Simon Flowers, Chairman and Chief Analyst at Wood Mackenzie, explores how the future belongs to companies that can integrate intelligence across value chains, from upstream investment and mineral demand to AI-powered scenario planning.
By Simon Flowers, Wood Mackenzie
The global energy landscape has entered an era of unprecedented complexity. What began as a straightforward transition narrative, with renewables replacing fossil fuels, has evolved into something far more intricate. Today's energy system spans 250 emerging technologies across multiple interconnected value chains. Solar and wind capacity additions dwarf traditional power sources, yet oil demand remains stubbornly resilient.
"What began as a straightforward transition narrative has evolved into something far more intricate."
Wood Mackenzie's latest analysis reveals a striking paradox. Despite record renewable capacity additions and electric vehicle growth, oil demand will climb from 104 million barrels daily this year to peak above 108 million by 2032. This reality check shows an energy evolution where every component becomes increasingly interconnected.
The continued resilience of oil stems from three critical factors stalling progress. These include heightened energy security concerns, Western discomfort with Chinese cleantech dominance, and a staggering US$3.5 trillion annual investment shortfall for low-carbon infrastructure.
The supply crunch looms large
Meeting rising energy demand through new supply creates a broad spectrum of investment opportunities for energy companies, natural resources firms, and governments alike. Demand for oil and gas, and even coal, may be more resilient than imagined a decade ago. Meanwhile, the development of commodity markets, such as low-carbon hydrogen and carbon trading, while slow today, is likely to see rapid growth in the 2030s and beyond. Critical minerals essential for electrification, particularly copper and lithium, face a prolonged demand boom.
Sustained investment across supply-related sectors will be crucial to meet future demand. The total investment required, sector allocation, and timing all depend on the energy evolution's pace. This uncertainty creates a wide investment range: from US$72 trillion in Wood Mackenzie's delayed energy transition scenario (DETS), a 3°C pathway, to US$78 trillion in our base case 2.5°C pathway, and US$117 trillion if net-zero by 2050 is achieved. Investment opportunities vary significantly across sectors between these different scenarios.
Complexity replaces simplicity
As the energy transition has evolved, renewable substitution has been transforming into energy interconnection. Green hydrogen projects compete with data centres for renewable electricity. Critical mineral shortages ripple through automotive and storage sectors.
European companies face particular exposure to this evolving landscape. Caught between aggressive diversification strategies, US policy reversals, and Chinese competition, they must maintain decarbonisation momentum amid economic pressures. They increasingly prioritise affordability over sustainability in the near term.
The intelligence imperative
The traditional approach of conducting comprehensive scenario analysis annually no longer suffices. These exercises require months to synthesise data across business units. By the time they conclude, market fundamentals may have shifted dramatically. Most companies still operate with siloed thinking, analysing individual market segments without understanding how they interact, influence each other, and respond to external pressures as a unified system.
When supply chains span continents and regulatory frameworks shift rapidly, this approach cannot account for critical interdependencies. These interdependencies define modern energy markets.
Investment patterns reflect this complexity. Renewable, grid and storage investment jumped from US$755 billion in 2015 to US$1.027 trillion in 2023. Thermal investment fell from US$134 billion to US$106 billion. Yet this transition creates investment opportunities alongside complex new risks.
Evolution, not revolution
As energy demand continues to grow, the world will need to increase supply each year. Low-carbon technologies add another string to the systemic bow, enriching the mix. However, rather than substituting fossil fuels, they are currently only adding supply to meet rising demand. What we are witnessing is an ‘energy evolution’ that will play out gradually and which has already led to an energy mix that is far more diverse than it was at the start of the 21st century. It's a complex transformation where understanding the interconnection between the different value chains becomes the ultimate competitive differentiator.
"It's a complex transformation where understanding the interconnection between the different value chains becomes the ultimate competitive differentiator."
Companies positioning themselves for success recognise that traditional sector-focused analysis cannot navigate today's complexity. When every decision carries significant implications for investment returns and business performance, the ability to see and respond to the full picture becomes critical for survival. When supply chains span continents and regulations shift rapidly, integrated intelligence becomes essential.
The survival imperative
Success requires seeing the full picture. Political pressures, technological advances, economic volatility and environmental imperatives continue to reshape market dynamics at an unprecedented pace. In this environment, the choice between siloed thinking and integrated intelligence isn't about competitive advantage. It's about survival.
With billions hanging in the balance and global energy security at stake, companies that thrive will navigate complexity through an interconnected view of the energy landscape. Those mastering the interconnected journey will transform the way we power our planet. Those who don't risk being left behind.