ENERGY MARKET OUTLOOK FOR 2022

Traditional energy companies are having an identity crisis. Despite a strong profit outlook heading into 2022, enormous pressure is coming from providers of capital and other stakeholders to evolve business models for the new energy economy, as we’ve seen with examples like Shell, ExxonMobil, etc. Let’s examine the price dynamics in the oil and natural gas markets that will impact the energy sector as we head into 2022.

As of mid-November 2021, 48 out of 55 US large investor-owned utilities had committed to reduce carbon emissions, many by   2050.7 And nearly three out of four  customer  accounts  were served by an entity with a 100% carbon reduction target—either    an individual utility or a utility owned by a parent company with a 100% target.8 In 2022, more utilities will likely jump on board and firm up commitments and strategies, driven by consumer support; opportunities for value creation;9 environmental, social, and governance (ESG) goals;10  evolving state clean energy mandates, and federal legislation. Even outside of state mandates, 24 utility parent companies have adopted voluntary carbon-reduction  targets, with 20 aiming for 100%.11 The administration’s goal to reach 100% clean electricity by 2035 is another key driver, and we’ll be watching federal policy, investment, and research support that could help make it happen.

Are utilities on track? The US electric power sector has reduced carbon emissions 40% since 2005. Progress has come largely from retiring coal-fired generation and replacing it with natural gas, wind, and solar; 56% of new generation capacity added in the five years from 2016–2020 was wind and solar, rising to 86% in the first eight months of 2021.12  That progress may be why 86% of our power   and utilities industry survey respondents said their company is on track to meet its decarbonization goals. But over 60% of US electricity is still generated by carbon-emitting sources,13  so there’s  a long way to go. And, for many utilities, significant gaps between their decarbonization targets and their scheduled fossil fuel plant retirements, renewable additions, and flexibility requirements needed to achieve full decarbonization mean the math does not yet add up to reach their goals.14

What’s holding them back? Utilities are trying to thread the decarbonization needle while maintaining reliability and affordability, a difficult task as they boost variable renewables.

To do it, they’re building a more flexible, modern grid—and that requires investment. In addition, some utilities may face stranded costs of retiring fossil fuel-based generation earlier than planned. And according to the Smart Electric Power Alliance, utilities will need to further transform their culture internally to manage these changes.15 What’s more, digital skills gaps are widening as the power sector digitizes, mirroring gaps in the broader economy   and sparking fierce competition for talent.16 Finally, as the power sector approaches 80% to 85% clean electricity in the coming years, progress could slow unless new technologies, such as long-duration energy storage and green hydrogen, have been commercialized. US Department of Energy programs are already investing in reducing the cost of these technologies . We’ll be watching as the federal government moves forward with Infrastructure Investment and Jobs Act (IIJA) investment of about $23 billion into these technologies as well as advanced nuclear and carbon capture and storage.

In the next year, more utilities will likely announce decarbonization goals and interim targets, increase existing targets, and flesh out their decarbonization strategies with strategic plans for implementation as stakeholder interest grows. Overall utility ESG reporting may become more detailed and consistent as well.

Federal policies will likely become more clear, as well as the impact they may have on the transition. And technological advances are a wild card worth watching.

The unprecedented frequency, intensity, and unpredictability of extreme climate and weather events in 2021 point toward an increasing focus on utility resiliency strategies in 2022. A recent report counted 3,165 extreme weather events globally during the 2010s and 3,536 events between 2000 and 2009, compared to just 711 in the 1970s.17 In the first three quarters of 2021, the United States experienced 18 weather and climate disasters with losses exceeding $1 billion per event. The annual average for the last five years (2016–2020) was 16.2 disasters surpassing $1 billion, and the 1980–2020 annual average was 7.1, inflation-adjusted.18    A US interagency report projected that due to climate change, future extreme events that can cause power outages will be more frequent and last longer.19 The majority of our power and utilities industry survey respondents have already noticed an impact, with 51% saying extreme weather has affected the reliability of electricity delivery in their territory more than usual in the past year, while   38% saw the impact unchanged.

For electric utilities, resiliency planning is key because extreme events such as wildfires can impact both electricity supply and demand—a costly double whammy. In addition to wildfires, events may also include heat waves, deep freezes, sea-level rise, floods, and more intense storms. Experts have made it clear that global weather patterns are in uncharted territory and planners can no longer use the past to predict the future.20 In 2022, utilities are expected to continue proactively preparing for that uncertain future.

One of the biggest challenges is the cost of resiliency investments, which can be a subject of debate between utilities, state and local governments, and regulators. Yet community resilience plans can also be a source of cooperation, and public-private partnerships  can help fund resilience projects. For example, a $500 million project to bury some of the most vulnerable power distribution  lines within the District of Columbia is funded by a public-private partnership, with $250 million coming from the city and $250  million through local utility Pepco’s rates.²¹ At the federal level, policies such as the Federal Energy  Regulatory  Commission’s (FERC) Order 2222 aim to ultimately bring more DER onto the grid, which could contribute to longer-term resiliency. We’ll learn more  as grid operators file implementation plans by the end of April  2022. And the recently approved IIJA allocates nearly $27 billion    for investment in electric grid infrastructure security, reliability, and resilience.22

In 2022, many utilities will likely revisit their disaster readiness   and resiliency plans, sometimes under new state regulatory requirements. We’ll also likely see additional utility data collection

and long-term system modeling, as well as increased collaboration with state and local stakeholders to plan and fund resiliency projects.

While we know building electrification has enormous potential to boost electricity demand, many see the impact as far in the future. But building stock, building codes, and related policies vary widely across the country—and as with electric vehicles, the future is arriving sooner in some areas. In California and the Northeast, some utilities are already adjusting operations to support growing building electrification, and more will likely follow in 2022. More than three-quarters of our power and utilities survey respondents (76%) said their company is preparing for increased electricity demand as building electrification rises.

US buildings account for nearly 40% of the country’s energy  use and greenhouse gas emissions,31 and nearly half of homes are heated primarily with natural gas.32 So, many states and

municipalities with net-zero carbon emissions goals see building electrification as critical. In August 2021, California became the first state to pass building standards that make electric heat pumps and appliances the default choice for new homes and small commercial buildings.33 The state’s 2022 building energy efficiency standards make electric heat pumps a more cost-effective choice than natural gas heaters and boilers in new homes or for major renovations starting in 2023.34  The code also requires all new homes to be  wired for electric appliances, including electric vehicles.35

Across the country, dozens of cities and counties, mostly in California and the Northeast, have passed ordinances that either encourage or mandate all-electric buildings in new construction.36 This trend will likely continue in 2022. New York State has approved nearly half a billion dollars in funding for heat pumps through 2025.37 New Jersey’s Energy Master Plan states that electrifying

90% of the state’s buildings by 2050 is required to meet its climate goals.38  In some northeastern cities where much of the new housing is electric, winter peak demand is already higher than in previous years. And some utilities are already changing selected substations from summer peaking to winter peaking. Utilities in these areas are beginning to plan for a future with two annual electricity demand peaks: summer and winter. In 2022, more utilities will likely reconsider maintenance schedules for assets that may be utilized for more of the year and therefore potentially have shorter life cycles.

Looking into 2022 and beyond, many expect that the grid will be able to handle increased electricity demand, but additional investment may be needed in home weatherization and

grid-responsive appliances to help manage energy use and shape load. Additional energy storage will likely be needed as well, both    in front of and behind the meter. Behind-the-meter energy storage capacity in the United States is projected to grow about 74% year over year in 2022, to more than one gigawatt, while utility scale

storage is projected to increase about 23% to 5.4 GW.39 Utilities will

likely continue to develop new rates and implement flexible load programs to incentivize behavior. In the long run, many utilities see electrification as a way to increase electricity sales while reducing customer bills since the cost of system upgrades would be spread across a broader base.

1. US Energy Information Administration (EIA), “Electric Power Monthly, Sales of Electricity to Ultimate Customers,” accessed October 27,
2. S&P Global Market Intelligence, “RRA Financial Focus, Utility capital expenditures update,” April 8,
3. EIA, Electric Power Monthly, Average Price of Electricity to Ultimate Customers, accessed October 27,
4. EIA, Electric Power Monthly, Net Generation by Energy Source, accessed October 27,
5. Federal Energy Regulatory Commission, “Energy infrastructure update,” August 2020, p. 4 and August 2021, p.
6. The White House, “Updated Fact Sheet: Bipartisan Infrastructure Investment and Jobs Act,” August 2,
7. Smart Electric Power Alliance, “Utility Carbon-Reduction Tracker™,” accessed November
9. Stanley Porter and Kate Hardin, Navigating the energy transition from disruption to growth, Deloitte Insights, May 27, 2020, p.
10. ZPryme and National Public Utilities Council, Utility decarbonization has an air of uncertainty, September 2021, p. 3. According to the study, 55%  of investor-owned utility respondents said utility shareholders apply ESG criteria to their business, and 60% report their investors are asking for decarbonization investment
11. Smart Electric Power Alliance, “Utility Carbon-Reduction Tracker™.”
12. Federal Energy Regulatory Commission, Office of Energy Projects, “Energy Infrastructure Update – New generation in-service (New build and expansion),” August 2021 and December 2020, 2019, 2018, 2017, and
13. EIA, Electric Power Monthly, Net Generation by Energy Source, accessed October 27,
14. Stanley Porter et al., Utility decarbonization strategies: Renew, reshape, and refuel to zero, Deloitte Insights, September 2020, p.
15. Smart Electric Power Alliance, 2021 Utility transformation profile executive summary, p.
16. Jim Thomson et al., The decarbonized power workforce: Digital and diverse, Deloitte Insights, June 2021, pp. 10–11.
17. World Meteorological Organization, “Weather-related disasters increase over past 50 years, causing more damage but fewer deaths,” August 31, 2021.
18. National Centers for Environmental Information, “Billion-dollar weather and climate disasters,” noaa.gov, accessed November 10, ”
19. United States Global Change Research Program, “S. Climate Resilience Toolkit,” June 14, 2021.
20. Ethan Howland, “MISO, ISO-NE execs stress need for new power supply planning framework at FERC reliability meeting,” Utility Dive, October

21, 2021; Brad Plumer, “A glimpse of America’s future: Climate change means trouble for power grids,” New York Times, February 16, 2021.

21. District of Columbia Power Line Undergrounding (DC PLUG), “Resources,” dcpluginfo.com, accessed October 2021; DC.gov Office of the City Administrator, “Mayor Bowser, Pepco break ground on $500 million to underground power lines in the District,” press release, June 14,
22. 117th US Congress, R.3684 – Infrastructure Investment and Jobs Act, accessed October 2021.
23. S. Department of Energy, Office of Science, “How 5G may boost science research,” August 18, 2021.
24. Jack Fritz et al., Accelerating enterprise innovation  and  transformation with 5G and Wi-Fi 6: Deloitte’s Study of Advanced Wireless Adoption, Global edition, 2021, p.
25. Gaurav Gopal, Semra Barutchu, and Christine Calhoun, “5G powered utility transformation,” Infosys Limited, January 2020, p.
26. State utility regulatory commissions are approaching utility requests to include 5G investments in rate base on a case-by-case basis, and results vary so
27. Ben Hertz-Shargel, “Energy reliability, resilience, extreme weather and other updates from the grid edge in Q3,” Wood Mackenzie, August 3, 2021; California Public Utilities Commission (CPUC), “CPUC continues efforts to help ensure grid reliability this summer,” press release, March 25,
28. Ryan Hledik et al., The national potential for load flexibility: Value and market potential through 2030, The Brattle Group, June 2019, 25.
29. American Council for an Energy-Efficient Economy (ACEEE), “Energy efficiency as a resource,” accessed October
30. Herman K. Trabish, “Two barriers to utility and customer savings with flexible loads and how regulators can help,” Utility Dive, January 6,
31. Environmental and Energy Study Institute, “Buildings and built infra- structure,” accessed October
32. Chrishelle Lawrence and Chip Berry, “S. households’ heating equipment choices are diverse and vary by climate region,” Today in Energy, EIA, April 6, 2017.
33. Jeff St. John, “California takes bold steps to make electricity the fuel of choice for new buildings,” Canary Media, August 11,
35. California Energy Commission, “Energy Commission adopts updated building standards to improve efficiency, reduce emissions from homes and businesses,” press release, August 11,
36. Talor Gruenwald and Mina Lee, “2020: Watt a year for building electrifi- cation!,” RMI contributed content in GreenBiz, December 30,
37. Justin Gerdes, “So, what exactly is building electrification?”, Greentech Media, June 5,
38. Gruenwald and Lee, “2020: Watt a year for building electrification!”
39. Wood Mackenzie, US energy storage monitor, Q3 2021, accessed September
40. 117th US Congress, R.3684 – Infrastructure Investment and Jobs Act and H.R.5376 – Build Back Better Act, accessed October 2021.