Beyond electrification: Why infrastructure, industrial ecosystems and geography could shape the next phase of the energy transition

The recent conflict involving Iran has exposed the vulnerability of fossil fuel dependency for the second time in under a decade. Once again, energy security has moved to the forefront of the energy trilemma: keeping energy clean, affordable and secure. At the same time, progress in the technologies underpinning the energy transition has continued. Solar panels and batteries are now manufactured at enormous scale, commodity input costs have fallen sharply from prior peaks, and financing conditions have not become a fundamental barrier to deployment, as they did post the invasion of Ukraine.

We believe the latest energy shock will reinforce this trend. For many countries, generating electricity from domestic renewable resources is no longer simply a climate objective. It is increasingly becoming an energy security objective as well.

However, focusing solely on electricity risks missing the next challenge. Many of the products consumers use every day remain closely tied to fossil fuel markets. Natural gas remains a critical input into fertiliser production and therefore food prices. Aviation depends on liquid fuels. Steel, cement and chemicals require industrial processes where electricity alone is often not sufficient. While renewable electricity has become increasingly competitive, replacing fossil fuels across the rest of the energy system is proving a fundamentally different proposition.

To understand how this next stage is evolving, we recently visited two flagship European projects. Northern Lights in Norway is developing Europe's first integrated carbon capture, transport and storage network. In Bilbao, Spain, Repsol and its partners are building one of Europe's first commercial-scale e-fuels facilities using renewable hydrogen and captured carbon dioxide. Although the technologies were very different, the conclusions we drew were remarkably similar.

The first phase of the energy transition has been defined by technologies that could be manufactured at scale. Since 2010, solar module costs have fallen by around 90%¹, battery pack prices by a similar magnitude and the cost of onshore wind has also declined dramatically. These reductions were not simply the result of supportive policy. They reflected the characteristics of the technologies themselves.

Solar panels and batteries are modular, highly standardised products manufactured in increasingly automated factories. Every doubling of cumulative manufacturing capacity has reduced costs by around 20%¹ as producers improved production processes, reduced material usage and captured economies of scale. Lower costs combined with policy support stimulated demand, encouraging further investment in manufacturing capacity and creating a powerful feedback loop.

Renewable capacity has expanded extraordinarily quickly, but global energy demand has continued to rise. Much of the additional renewable generation has therefore met new demand rather than displaced existing fossil fuel consumption. More importantly, electricity represents only part of the global energy system.

Outside electricity, the challenge changes. Many industrial processes require molecules rather than electrons. Hydrogen is used to produce fertiliser. Liquid fuels remain essential for aviation because of their energy density. Cement and steel production involve chemical reactions that cannot simply be electrified. These sectors are often described as "hard to abate", but the phrase arguably understates the challenge. The issue is not simply reducing emissions. It is replacing the role that fossil fuels have played for decades in industrial processes.

Clearly, wherever electricity can substitute directly for fossil fuels, it is likely to remain the most efficient pathway for decarbonisation and a step towards greater energy security for current energy importers. This is why the European Commission, for example, has made doubling the EU’s electrification rate a central pillar of its decarbonisation strategy.

The challenge is that not every use of fossil fuels can be electrified. Even under ambitious decarbonisation scenarios, sectors such as aviation, shipping, chemicals and parts of heavy industry continue to require molecules. It is these sectors that are now attracting increasing policy and industrial attention.

We therefore visited two of Europe’s flagship projects to assess how these technologies are evolving as the next phase of the energy transition moves from theory to deployment. We visited Northern Lights in Norway and the Petronor e-fuels project in Bilbao expecting to see two very different technologies. We came away with three common conclusions.

The debate around carbon capture and renewable hydrogen often centres on the technologies themselves. Will electrolysers for hydrogen become cheaper? Can the cost of capturing carbon fall sufficiently? Those are important questions, but they are not the be all and end all.

At the Petronor facility, we saw a project benefiting from many of the conditions advocates of renewable hydrogen would hope for. Spain offers some of Europe's lowest cost renewable electricity, the site sits alongside an existing refinery, has access to the Port of Bilbao and already serves industrial hydrogen customers looking to decarbonise. Yet even under these favourable conditions, the economics remain somewhat challenging with grey hydrogen costing $1–$2/kg versus green hydrogen at $3–$6/kg, reinforcing the importance of carbon pricing and supporting regulation.2

Northern Lights reached a similar destination through a different route. The capture technology itself has matured considerably over recent years, yet the economics of the project depend just as much on transport, storage and regulation as they do on the capture unit itself.

Technology will undoubtedly continue to improve, but our visits suggested that commercial viability increasingly depends on the value chain and policy framework surrounding it rather than the technology in isolation.

At Northern Lights, capture facilities, shipping operators, storage terminals, offshore injection wells, regulators and industrial customers all need to operate together before a single tonne of carbon can be permanently stored. Remove one part of the chain and the entire system stops functioning.

The same was true in Bilbao. Renewable electricity, hydrogen production, carbon dioxide supply, refining infrastructure, logistics and downstream fuel demand all must develop together. Building an electrolyser alone does not create an e-fuels industry.

This is an important distinction from the first phase of the energy transition. Solar panels and batteries could largely be manufactured, shipped and deployed independently. These newer technologies appear much more dependent on industrial coordination and existing infrastructure. In our view, the ecosystem may prove just as important as the technology itself.

Both projects also reinforced the importance of location. Northern Lights benefits from decades of offshore engineering expertise and unique geological formations beneath the North Sea capable of storing carbon permanently. Bilbao combines abundant renewable resources with existing refinery infrastructure, port facilities, skilled labour and industrial customers already consuming hydrogen.

These advantages are difficult to replicate. Unlike a solar panel or battery factory, many of the assets required to support carbon capture and renewable molecules are inherently local. Geology cannot be manufactured, ports cannot be relocated and industrial clusters take decades to develop.

That suggests the next phase of the transition may become increasingly regional. Competitive advantage may depend less on manufacturing costs alone and more on the combination of natural resources, infrastructure and industrial capability available in a given location.

The first decade of the energy transition rewarded companies that could manufacture technologies more cheaply every year. That remains true for solar, batteries and much of the electricity system.

Our visits suggest that the next decade may look different. Decarbonising heavy industry, aviation and chemicals is unlikely to depend on technology alone. Infrastructure, regulation, industrial coordination and geography all appear likely to play much larger roles than they did during the rollout of solar and batteries.

For investors, manufacturing innovation will undoubtedly remain important, but the next opportunities may increasingly emerge where technology, infrastructure and industrial capability come together. Further, as governments increasingly prioritise energy security alongside decarbonisation, projects capable of strengthening domestic industrial resilience are likely to receive greater political support. Therefore, the next phase of the transition may not simply reward the next breakthrough technology. It may reward the ecosystems that make those technologies commercially viable.