THE ENERGY INDUSTRY TIMES - JUNE 2017 Final Word 16 Learning from cavemen Energy transitions are not new; they have been ongoing since cavemen first discovered fire. Over the centuries we have seen wood replaced by coal and the move to oil and gas. What is different this time, however, is the speed of change. The rate at which the energy industry is moving towards renewables is nothing short of staggering. At the recent Financial Times Energy Transition Strategies, part of the FT Clean Energy Week, the changing energy landscape was a topic of hot debate. Opening the conference, Wilfrid Petrie, CEO, Engie, UK & Ireland, said: “This transition to clean energy has not been smooth and will not be smooth. In the last six years, European utilities have had to write off €100 billion worth of assets. We have had to mothball 50 GW of gas fired power plants… It has been quite a significant transition, in fact it feels more like a revolution.” Commenting on the pace of change, he added: “This is because there are a certain amount of technologies available, the awareness today is bigger, the ability to mobilise the public is much greater than before and I think we can expect this energy revolution and the uprising of renewables to happen even more quickly.” Engie has been transforming its company in line with the changing market. In March it sold its British shale gas interests to petrochemicals firm Ineos. It is all part of a move to reduce its exposure to oil, gas and power prices, which have tumbled in recent years. The plan is to reinvest the €15 billion it expects to raise from the divestment into energy services, renewable power and gas pipelines where revenue is regulated or more predictable. Others, like Dong, RWE and E.On, have been making similar moves. Just last month (May) Dong agreed to sell its upstream oil and gas business to Ineos for $1.1 billion as it continues to exit the fossil fuel arena. Meanwhile, both the big German utilities have restructured their businesses, hiving off conventional generation into separate companies. Also speaking at the conference, Johannes Teyssen, CEO, E.On said: “There has been a fundamental change. Even if you look back just a few years, there was not a consensus that we were living in the midst of a transition. It took us a while to accept that it’s not just German politics that is fundamentally driven by technology and customer desire. Whilst we embraced it, we thought again it’s not that important how fast it would go, but that it will continue. “So we will see a distinction between the system-based world – driven by centralised facilities that are needed to keep the lights on – and the customercentric business, which is greener and much more decentralised. We decided we could not be in both worlds and thus split the company.” The speed of the transition has certainly taken most by surprise but the pace at which it will continue and its ultimate extent is a question that divides the industry. Lord Adair Turner is Chairman of the Institute for New Economic Thinking and Chair of the Energy Transitions Commission. Notably he was the first Chair of the UK Climate Change Committee (CCC). Speaking on a panel addressing the energy revolution, Lord Turner recalled: “When I look back at the cost estimates we were making during the first year of the work of the CCC in 2008, frankly, I’m just embarrassed because we completely failed to predict that wind costs would come down by 60-65 per cent and solar would be down by 85 per cent.” As costs continue to plummet, there is a growing question of whether it is possible to build a near 100 per cent renewables electricity system at a reasonable cost. “The answer we’re getting is definitively, yes,” said Lord Turner. “Even with just storage and gas plants for peaking, by 2035 at the very latest you could get the cost of a near 90 per cent renewable power system down below 7¢/kWh; that’s the cost of everything – with the backup, the flexibility. “And having developed those figures by autumn last year, my worry now, is that in 10 years time, I’m going to be embarrassed by how pessimistic those assumptions were as I am by those assumptions in 2008.” One school of thought is that the rapid fall in costs for renewables and storage, and the emergence of new technologies, will see the economic case – never mind the environmental argument – for fossil fuelled power generation dwindle. Others argue, however that we should be cautious about predicting the end of the hydrocarbon era. Professor Jason Bordoff, Founding Director, Center on Global Energy Policy, School of International and Public Affairs, Columbia University, said: “We’ve been talking about energy transitions for quite a long time, yet fossil fuels continue to supply more than 80 per cent of the global energy mix. I think that’s important because two things can both be true and sometimes they get conflated. “Renewables will without question be, by far, the fastest growing form of energy in the world. That can be true and the world 20 or 30 years from now can still be overwhelmingly powered by hydrocarbons.” Considering the overall growth in energy demand and the difficulty in decarbonising sectors such as aviation, steel and cement, this is entirely possible. Spencer Dale, Group Chief Economist at BP, essentially backed this thinking. “Our central guess is that energy demand will rise by around a third over the next 20 years – all of this comes from developing countries. We are absolutely seeing an energy transition but the nature of that transition will be coloured by the nature of this increasing energy demand.” Dale made his second point by looking at history, noting that “energy transitions take a very long time”. He said it took 45 years for oil to rise from 1 per cent to 10 per cent in the global energy mix, more than 50 years for gas, while nuclear represented 1 per cent in 1974 and still has not achieved 10 per cent. “Renewable energy – wind, solar and biofuels – is around 7 or 8 years into its clock,” said Dale. “BP’s central guess is that it achieves 10 per cent by 2035. That will be a quicker transition than any fuel has ever seen in history but it will meet only 10 per cent of the world’s energy needs in 2035. Yet we should be careful of using the past to predict the future. Juliet Davenport, Founder and CEO of green energy company, Good Energy, made a very telling observation, at least for the electricity sector. She explained: “This transition includes a lot more people than ever before. If you look at the transition in gas and oil, most of that is done from one end of the pipe to the other end; it has been delivered from the industry to the consumer. This is the first time the consumer is looking down the pipe and putting something back the other way. This is the first time we’ve seen this transition in a two-way energy market. “This approach of looking at the energy market from completely the other way around is why potentially we could see a transition that is much faster than historical transitions. It’s not going to obey any of the laws we have seen before because suddenly we’ve got consumers in the market as well and they will shape things in a completely different way to what we have seen before.” It was Kingsmill Bond, New Energy Strategist at TS Lombard, however, who perhaps made the strongest statement on the pace of the transition. While he said the question of whether the industry could get to 80 or 90 per cent of renewables was “inappropriate” at this stage, he stressed that the widely held view that transitions take a very long time was a “completely wrong understanding of history”. He explained that there are two types of energy transition. Using financial markets as an example he said: “There is systemic change, which takes a very long time but is actually irrelevant in financial markets, and there is marginal change, which is what drives financial markets.” For example, out of nearly 100 million cars sold last year, only 1 million were electric, yet this has not stopped car companies making the shift to electric vehicles. Lighting is another example: demand for gas for lighting peaked in 1914 when electricity was just 3 per cent of the market. The point is that old technology can peak when new technology is still in its infancy. “You can get very radical change taking place when the new technologies are tiny,” said Bond. If India is anything to go by, he could well be right. India’s solar ambitions, once seen as implausible, demonstrate how dramatically change can occur. In this transition, innovation and consumers will dictate the pace and those who base their strategy on history could be left in a cold, dark place. Junior Isles Cartoon: jemsoar.com
Energy Industry Times June 2017
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