The evolving energy mix: A sector navigates change

The energy landscape is undergoing a significant transformation across the globe—but especially in North America, driven by a surge in electricity demand far greater than what the region has seen in decades. This increase is due to multiple factors, including rising data center demand, electrification, electric vehicle adoption, and new industrial manufacturing and energy facilities coming online with increasing electricity needs.

That rising demand, combined with recent growth in clean energy sources, is reshaping the industry. There are implications for the ability of the U.S. to create the data center capacity needed to win the artificial intelligence arms race, as well as for energy companies to meet environmental, social and governance goals; qualify for tax incentives; and achieve speed to market, among other objectives. We expect to see increased partnerships between major technology companies and utility companies to manage this demand spike.

Policy drivers

Since January, the U.S. administration has put forth a series of executive actions—ranging from executive orders to tariff announcements—that clearly signal a new direction in domestic energy policy. This new policy favors growth in fossil fuels and electricity while scaling back the support that wind and solar energy had under the prior administration. Uncertainties remain in the specific implementation of these new policies, so we approach these actions in the same way that energy business leaders should: by considering the general direction set by the administration as well as the market and policy forces that will shape the final outcomes.

The One Big Beautiful Bill Act recently enacted in the United States will phase out wind and solar credits and incentives earlier than expected, with aggressive timelines for project construction to remain eligible, further complicated by the executive order that followed to establish strict parameters for the construction qualification.

Still, the vast majority of such projects will continue—albeit with negative impacts on the project economics—primarily because they have a significant advantage in build speed, and even in cost, over other energy sources like natural gas or nuclear power.

The continued rise in clean energy sources will complement—rather than replace—oil and gas, which will continue to see strong demand for decades. Natural gas, especially, is positioned to be a key energy source, serving as a lower-carbon alternative to coal to help meet the rising demand for power. Increases in demand for liquefied natural gas (LNG) globally will drive increases in gas production and LNG export capacity.

Canada has long been a leader in clean and renewable energy, with 57% of its electricity coming from hydroelectric sources, another 14% from nuclear and 7% from wind and solar. While U.S. policy changes and uncertainty will spill over into Canada, the subsector still has momentum, as Canada’s focus on clean energy aligns well with the focus of other countries around the globe that are shifting to energy and products with lower carbon footprints.

Energy dominance requires an ‘all of the above’ approach

While fossil fuels are now back in play and wind and solar may be pushed to the sidelines, the administration’s goals of ensuring affordable, abundant energy will still require significant growth from a variety of sources, beyond just renewables.

The latest U.S. policy further cements natural gas as a top energy source in North America and globally, and reinforces the United States’ global leadership in natural gas production and exports.

Policy shifts will have less impact on oil and gas output and LNG capacity in the near term compared to the expected effects on commodity prices and economic conditions. However, the more favorable policies across the fossil fuel landscape, along with the promise of investments in energy infrastructure (especially gas pipelines and electric transmission lines), are likely to support further investment in the long term.

Nuclear power has reemerged as a favored source of carbon-free baseload power for the first time in decades, especially to meet the needs of data centers. Hyperscalers, states and various private entities are investing in nuclear power, whether by restarting old nuclear plants, building new ones or exploring the potential of small modular nuclear reactors.

The role of AI

The world is in an AI arms race that depends on data center growth, and several data center builders are citing electricity availability as a top constraint to building new capacity. 

Regardless of the actual amount, the key takeaway is that demand, which was nearly flat from 2008 to 2023, will undergo explosive growth.

Fortunately, AI is not only the cause of the demand growth, but will inevitably be part of the solution. Among various use cases for energy companies, AI solutions are already creating efficiencies in consumption to reduce electricity demand, optimizing usage of existing grid infrastructure to get more out of what we already have, and intelligently coordinating consumption across systems and locations to shift electricity load to off-peak periods.

To remain competitive and resilient, energy companies are also increasing their adoption of analytical AI technologies, including machine learning. While specific use cases for AI vary widely across energy subsectors, they generally revolve around a few key categories:

• Optimization of industrial operations
• Environmental monitoring and emissions reduction
• Business process improvements
• Safety and security enhancements
• Talent and skill development
• Improved customer experience
   

Larger, leading-edge energy companies have tested and refined numerous practical use cases for AI in the energy space. Middle market companies can benefit from the lessons learned and investments made by these early AI adopters to chart their own adoption journey.

Resources for the road ahead

Funding, liquidity challenges and arduous permitting processes for infrastructure projects are all factors that energy companies will continue to face, depending on which subsector they operate in. Additionally, the energy sector faces challenges integrating renewable energy into the grid; ensuring cybersecurity keeps pace with the sector’s rapid digitalization; adopting new technologies like AI and automation to improve operational efficiencies; and training and retaining talent that can support new grid technologies.

Amid evolution in the energy sector, the importance of relationships between energy companies and trusted third parties will only grow. Organizations should assess how an external advisor can help them navigate areas such as:

• Regulatory compliance
• Managed information technology services and managed cybersecurity services
• AI adoption
• Mergers and acquisitions advisory
• Talent management

Creating a clear strategy to adapt to the shifting energy landscape will be paramount; companies that want to thrive in the future need to be intentional about everything from investments to technology use to project planning.