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The electricity sector and its incumbent electricity companies are undergoing an unprecedented, challenging but nevertheless critical transformation – a transition towards a more climate-resilient, less carbon-intensive power system which ends up “closer to the customer”. The widespread penetration of renewable energy sources into the electricity supply mix along with a constant push for more innovative technologies – whether on the entire grid or on the demand side – entails not only an opportunity to power societies in a more environmentally sustainable way but may also be perceived as a precipitous assault on the reliable supply of electricity. In any event, one of the most critical components of building tomorrow’s electricity sector is attracting the necessary investment.
A new World Economic Forum report “The Future of Electricity – Attracting Investment to Build Tomorrow’s Electricity Sector”, written in collaboration with Bain & Company, outlines how to attract needed investment and seize those new opportunities via integration, expansion and modernization. The instructive report offers sensible recommendations for policy-makers, regulators and businesses in OECD markets. Ideally, three main goals have to be synchronized while at the same time leaving room for the companies’ business models to yield a profit: energy supply security, environmental sustainability and economic competitiveness. The latter refers to keeping economic growth and development humming by way of keeping electricity costs manageable.
Electric utilities basically know how to get out of the ‘predicament’ they currently find themselves in. They also know that they have to adapt their traditional model to the new environment – an environment often very much in flux. However, the devil is in the details with regard to the envisioned market design and their own ‘revamped’ business models – very costly details for traditional players in the electricity market with suddenly more decentralized competition but the same old ‘obligation to serve’.
Ignacio Galán, Chairman and CEO of Iberdrola (Spain), describes the transformative forces at play in the ‘new’ electricity market:
“A mix of technological, economic, regulatory, environmental and societal factors is resulting in a lower carbon, digitized electricity system with new players emerging. This new landscape will be more complex and interrelated than ever before. At the same time, the IEA estimates that an investment of $7.6 trillion through 2040 will be required from countries in the [OECD]. In a sector accustomed to long-term investment cycles and stable policy frameworks, this transformation introduces policy uncertainties and market design complexities.”
What is important to understand here is that there is an almost invisible link between ‘attracting the necessary investment’ for generating as well as delivering reliable power and ‘uncertainty’. The report stresses that “[u]ncertainty over the future regime inhibits investment and threatens both decarbonization and security of supply” and admonishes regulators “to harmonize incentives, encourage appropriate physical interconnection and remove unnecessary regulatory barriers to competition between existing and new participants.”
So, while policy-makers are encouraged to “create policy frameworks that are efficient, stable and flexible, recognizing the inherently uncertain technological and economic environment we live in,” regulators are expected to provide clear guidance to markets without undue interventions.
As for the investment picture, the report points out that the “high level of investment seen over the last five years will need to continue if energy policy objectives are to be met. (…) Despite investing $3 trillion between 2000 and 2012, the sector is less than 30% of the way through – with a further $7.6 trillion required by 2040.” Most importantly, the report makes clear that “investment will be required across the board, in conventional and renewable, centralized and decentralized capacity ($180 billion annually), and the expansion and modernization of transmission and distribution grids ($100 billion per year).”
Following today’s discussions on the future of power generation and the energy mix one might fall victim to the misconception that conventional power will be obsolete in the future and therefore does not need any additional funding today. Well, if that were true countries around the globe would not discuss the concept of a ‘capacity market’ in order to maintain system adequacy. What, however, is true and should be welcome is the fact that “[s]marter technologies will be required to allow customers a wider range of choices, from a more active management of demand to the greater use of distributed generation sources.”
But this also comes at a price – requiring a high level of investment into networks that will “connect the new renewable generation and (…) provide reliable, flexible back-up capacity for the intermittent sources.” In this respect, consider what former US Secretary of Energy and Nobel laureate Steven Chu – Stanford University professor of physics and molecular and cellular physiology – had to say in an interview discussing the current energy landscape and the outlook for the future:
“There are countries that have about 25% intermittent energy integrated over the year. One of the challenges is how do you go from 25% to 50% and higher. It means you have to balance loads over wider areas, because the larger the area you collect energy, the more you can even things out. But at the 50% level you’ll need energy storage as well.”
High Levels of Investment Needed to Build Future Power Systems
In general, traditional electric utilities will have to get ‘closer to the customer’ in order to remain profitable businesses. Incumbent utilities have an advantage new entrants do not bring to the table; namely, “long-term relationships with and knowledge of their customers’ needs that they can leverage.” “The vast amounts of data produced by smart meters, connected devices and other consumer data offer potentially interesting business opportunities, including analysis of big data, providing opportunities to produce or consume electricity more efficiently,” the report notes.
Traditional utilities could capitalize on that by teaming up with technology companies. The graphic below illustrates both the current model and the envisioned future model. What is striking is a shift of seeming ‘market power’ from the electric utilities, which still operate predominantly under the ‘old’ power market structure paradigm, to basically pure ‘customer sentiment’. The result is the potential for energy flow in both directions, the opening up of new business and investment opportunities off the beaten paths and, above all, the emergence of the “prosumer” – often an enthusiastic adopter of the connected lifestyle based – ideally – on an environmentally-sustainable energy supply.
New Business & Investment Opportunities Emerge ‘Close to the Customer’
In sum, if distributed energy is to be integrated successfully into the grid, investment must be maintained across the board – i.e. also into upgrading conventional capacity – with, most importantly, “new remuneration systems (…) required that better value reliable grid capacity and the evolving role of network operators.” Note, the dynamic stability of the grid is reduced every time large-scale power plants are taken offline and are replaced by smaller-size renewable power sources, which are connected via grid-tie inverters (converts DC to AC power (e.g. solar)). It is all about getting reliable access to grid connections and this has to have a monetary value.
Read the entire “The Future of Electricity – Attracting Investment to Build Tomorrow’s Electricity Sector” report here.
This article was written by Roman Kilisek from Breaking Energy and was legally licensed through the NewsCred publisher network.