Generation in 3D

One thing that I now have more time to do is to step back and think about some of longer term trends that might affect the energy industry. This time I have been pondering the future of electricity generation  and I have come up with 3Ds which I think will drive investment over the long term.

DECARBONISATION 

The science that underpins climate change is now well established and the fact that man made emissions of carbon, mainly from fossil fuel burning, are one of the principal causes is becoming increasingly accepted. This means there is growing conflict between maximising the production of energy and minimising climate change.  For example, the UKs Energy Reserach Centre says that "a third of oil reserves, half of gas reserves and over 80% of current coal reserves globally should remain in the ground and not be used before 2050 if global warming is to stay below the 2 degreeC target agreed by policy makers". This potential conflict is starting to have an impact through the policies of major investment firms. This pressure is being applied initially to resource owning companies. As well as resource owners this will also start to apply to resource users and electricity producers will be in the front line. 

We will, therefore, need to largely decarbonise electricity supply over the coming decades and this has been the focus of a number of disjointed policy instruments. However, electricity has some unique features as a kWh is the same the world. A gramme of carbon emissions is the same the world over. Taking these two factors means that the carbon intensity of generation (ie grammes of CO2 per kWh) is comparable over both time and space. That gives us a foundation for policy. Every country and every large geneator should halve their carbon intensity every ten years. In the UK it's typically around 500g now so by 2025 it would be 250g, by 2035 it would be 125g and so on. This is technology neutral and would allow nuclear, renewables and carbon capture to compete. It can be used as the basis of a global deal in the electricity sector. I have called this idea, modestly, MARCHANTS LAW.

 The key point is that we are moving from high carbon to low or no carbon generation. 

DECENTRALISED OR DISTRIBUTED 

That past investment also tended to be on an industrial scale, with large utilities exploiting economies of scale by building ever larger power plants. We created the era of 'big iron' with coal sets reaching 500MW by the 1960s and now, in China, units of 900MW are common. Nuclear power stations have also got bigger and bigger (and more and more expensive but that's another story) with the latest targeting 1600MW. These big stations also created the need for a big transmission grid. As a consequence most people became disconnected, physiologically, from their source of power when they became physically connected to the grid. I think this is one of the reasons why we waste so much energy; we are remote from its production.

In the future, and increasingly in the present, we are reconnecting with sources of power generation. We are seeing the emergence of farm scale anaerobic digestors, community owned and scaled wind farms and there are nearly a million solar roofs in the UK already. When we own the means of production we start to care about our usage. When the power is produced close to demand it improves security of supply. These new technologies are generally zero carbon and are displacing high carbon, grid based fossil generation. Distributed energy is making a contribution to all three aspects of the energy trilemna. 

It is not just in the developed world that decentralised and distributed energy is making a difference. In Africa the availability of solar lamps is transforming the lives of the 500 million people without access to grid power. It is improving health, increasing education levels, eliminating carbon emissions and reducing poverty. It is rapidly becoming a disruptive force for good.

We are moving from 'big iron' to 'small silicon'. 

DIGITAL 

As well as being big and dirty generation used to be dumb. There may have been smart controls in the station itself and in the centralised grid despatch centre but the relationship between the two was and generally still is, definitely analogue. I suspect despatch orders are now sent by email but only a few years ago it was still all done by fax! Whilst some generation was load following this usually applied to a few large coal plants and other plant were either on or off. Processes and systems were designed in the 1960s and applied largely unchanged. It also meant that in times of stress generation plant just tripped off the system to protect itself. Indeed, the cause of many large scale grid outages around the world has been put down to exactly this response. 

The expontential advances in technology over the last fifty years or so are only starting to be felt in the generation industry. In the next few years we will see augmented technology being increasingly used in system control and plant despatch, possibly even extending to full scale artificial intelligent systems. This means that as we move from hundreds of large generation sets to thousands and thousands the system will cope faster and better than it does now and will be self healing. The tremendous reduction in the cost of sensors and data storage combined with the advances in data analytics will change the processes used to operate and maintain the stations themselves. For example, with the Internet of things leading to billions of connected devices there will be an order of magnitude increase in pieces of kit in a power station being monitored real time leading to the elimation of unexpected plant failures and simple time based maintenance. Nanotechology, addative printing and robotics will change how plant is built and maintained, what ever size it is. Finally in the next ten years one of the important and productive areas of research and innovation will be energy storage; be it batteries, phase change materials, electromechanical devices or some form of storage I haven't even heard of.

We are at the start of a revolutionary move from an analogue to a digital generation sector.

DISRUPTIVE 

 

The three themes of decarbonisation, decentralisation and digitisation will work together to completely transform the generation sector from the predictable, ponderous and polluting one we have now, to decarbonised, decentralised and digital one. This change will be as  radical as the shift from fixed line telephones to smart phones. A digital control system with enhanced storage will allow the integration of thousands of small, clean power stations to work together for the common good. The transition will be disruptive and leave some behind and create winners out of others. The only thing that is inevitable is change itself. 

 

Benchmark against the future

I believe that all businesses should apply a sustainability lens to their whole operation but this belief is firmly routed in a long background in business. Sustainability and long term valuation can and should go hand in hand. In fact I would argue that it is essential. However, I do not mean the version of sustainability that has been effectively hijacked by the green movement but I have in mind a much wider and deeper version. I start with my own definition which has at its core the more standard definition of sustainability. My definition is as follows;

 Growth that meet the needs of the present stakeholders whilst enhancing the ability of the                          organisation to meet the future needs of all stakeholders. 

This isn't just about shareholders. I think there are five stakeholder groups; staff, customers, communities where you operate, the environment (or natural capital providers if you want) and providers of financial capital. Sustainability means keeping the needs of all these in balance, itself a tricky task, as well as thinking about future needs. That got me thinking. Businesses of all sizes use benchmarking as a performance management tool. We benchmark ourselves against the past. Did our KPIs improve on last year? What is our five year track record? We benchmark ourselves against the present. How am I doing against my peer group? Where do I stand against best practise? However, we also need to benchmark ourselves against the future. This generates lots of questions that can be useful in developing a sustainabile business plan. Here are a few that spring to mind.

1. Is my resource usage robust against a scenario of increasing global scarcity?

2. Will my business model survive in a world of exponential technological growth?

3. Am I prepared for fundamental shifts in global demand, influence and power?

4. Where is our future generation of leaders going to come from?

5. Are we innovative and flexible enough to survive the pace of change which is only accelerating?

Understanding the right questions is the first step to a path of sustainable devolpment and growth. Businesses need to think through whether today's threats and opportunities are just that, today's problems, or are they are actually harbingers of mega trends that could have profound implications in the long term? Where are the weak signals of long term trends that we may be missing? What could happen, good or bad, and how would we respond to it?

By benchmarking against the future and embracing sustainablilty, businesses can prosper today, tomorrow and the day after tomorrow. 

A nightmare on Whitehall place

Another day, another speech on energy policy. This time I used as my theme the nightmare of me being the next Secretary of Energy and Climate Change.

I came up with the ten things I would kick off on my first morning behind the desk on Whitehall Place.

1. A long hard look at the real electricity security of supply situation for this coming winter involving a hard look at the data station by station.

2. A review of the CFD auction regime. This would involve both taking the battle on the levy control framework straight to the Treasury and also looking at the detailed auction rules to make sure that the second round of auctions produced useful results. 

3. A proper analysis of the two possible solutions to the Gordian knot of Energy supply, either proper joined up regulation or unhindered and vibrant competition with a clear view that a decision on which route would be taken quickly and cleanly.

4. An objective look at what has worked on energy efficiency and what hasn't, both in the UK and elsewhere.

5. Launch a campaign to increase acceptance of onshore wind within government and the media whilst driving costs down.

6. Announce a decision to introduce a proper independent, not for loss, system operator to take on many of the functions currently being given to a plethora of bodies.

7. Intiate renegotiations on the Hinckley C nuclear CFD contract as I wouldn't sign the current version at the current price.

The final three where the same as my three big ideas from a previous speech ( see. http://iansblog42.blogspot.co.uk/2015/05/three-big-ideas-for-big-challenge.html ) on unburnable carbon, heat policy and Marchants law which are all important but need careful thought.

I concluded that my appointment would be a real nightmare, certainly for the civil servants in DECC, but that maybe this nightmare wasn't as bad as what could happen! Some of the audience were nice enough to say they would vote for me which was very kind but reinforced my desire to never be a politician.

Three big ideas for a big challenge

I was asked to speak at the launch of Strathclyde University's Centre for Energy policy. The brief was to come up with a 'big idea' for a new direction in policy formation. In true Ian Marchant style I rather exceeded the brief and suggested three big ideas. 

The first idea was the formation of a Royal commission on the question of unburnable carbon. Our society is still dependent on fossil fuels and the UK is still dependent on the hundreds of thousands of jobs created by this industry. However, most analysis suggests that only around a half of all known global reserves of fossil fuels can be extracted before we trigger climate change that would cause serious damage to our way of life. All to often policy makers and, indeed, the energy industry, ignores this dilemma and seeks to maximise UK fossil fuel production whilst maintaining a strong commitment to limiting gobal climate change. The implicit assumption is that someone else, somewhere else, should leave their carbon in the ground. We never make this explicit, never say why we should be so fortunate as to use our own reserves and never specify who should lose out in the carbon scramble. This is not an easy dilemma to solve and we should get our best and impartial minds to address it and come up with practical policy recommendations.

My second idea was not really new. Over a third of our energy usage is on heat but the whole policy agenda in heat has been fragmented and short term. Any heat project depends upon a key customer to take the bulk of that heat. That is a local issue and the viability of any investment depends upon that heat customer surviving as you can't dump surplus heat onto a national grid like you can with electricity. We need a policy review that reflects these physical and economic realities. The main thing it needs to be is a long term policy, in fact it needs to be longer than for electricity. 

My third big idea is something I have modestly called "Marchants Law" following on from Moores law in the semiconductor industry.  Let me explain. Globally we need to largely decarbonise electricity supply over the coming decades but electricity has some unique features. A kWh is the same the world over. Wherever you are that KWh can charge your smartphone or light up your life. A gramme of carbon emissions is the same the world over. It has the same environmental impact regardless of its source. Taking these two factors means that the carbon intensity of generation (ie grammes of CO2 per kWh) is comparable over both time and space. That gives us a foundation for policy or my law. Every country and every large geneator should halve their carbon intensity ever ten years. In the UK it's typically around 500g now so by 2025 it would be 250g, by 2035   It would be 125g and so on. This is technology neutral and would allow nuclear, renewables and carbon capture to compete. It can work with both competitive and regulatory based market structures. It can work alongside other policy interventions. It can be used as the basis of a global deal in the electricity sector.

I put forward these ideas to stimulate better minds than mine to tackle a big challenge we face in the 21st century; how do we revolutionise our vital energy industry so that it continues to drive economic development without undermining our environment.

Is Cinderella coming of Age?

I have just read an interesting article in the Economist about energy effficency. Apparently, in 2014 industrialised countries used 0.9% less electricity than in 2013 and slightly less than in 2007 before the financial crisis. It would seem that the age old relationship between GDP and electricity consumption has changed. This could be because of new technology or simply increased awareness of energy efficiency, either way it's good news, provided we can keep this going.

The article looks at vehicle technology, energy use in buildings and smart energy systems including storage and demand side management and there is a lot of good stuff happening in these areas. In fact I have made a number of investments in small start up companies in these areas. However the article goes on to say "The International Energy Agency reckons that only one-third of the available energy-saving opportunities with a cost effective payback period are taken up. For businesses and residents alike, factors including ignorance, inertia and misaligned incentives still rule" I can see evidence of all these obstacles as well as a lack of trust in organisations and businesses promoting energy efficiency.

Tackling energy usage over the long term is going to take the best minds in engineering, behavioural economics, policy design and marketing but all too often it is seen as the Cinderella of the energy sector. That has to change so that Cinderella comes of age and hopefully there will be more articles like this in the future. 

May you live in interesting times

We are now only a few months away from the UK General Election and, at this stage, it seems to be one of the most unpredictable for a long time, if not ever. In fact, one report that I saw analysed 10 different possible outcomes for who would form the next government covering majority or minority governments for both the larger parties and then a whole raft of different coalitions.

The election is being fought on more predictable grounds with things like the economy and the NHS coming to the fore. Every now and then another topic seems to dominate the media coverage and so far energy hasn’t been one of them. I hope that at some stage in the next few weeks it does get an airing as the new Secretary of State for Energy and Climate Change is going to face some interesting issues in his or her in-tray. I think that the following will be near the top:

1. How is the UK oil and gas industry responding to the low oil price and what can Government do to create a stable and supportive investment climate? This folder will, I imagine, recommend a quick visit to No. 11 Downing Street.
2. What will be the outcome of the complete investigation of retail energy supply and how should the government of the day react given that, since the investigation was launched, competition has increased and prices have decreased?
3. What progress is being made on implementing the recommendations of the Wood report to secure the long term stewardship of the North Sea assets to maximise long term recovery?
4. Is the much vaunted Electricity Market Reform actually going to secure the UK’s security of supply over the next couple of winters, and then put us on the road to decarbonising the electricity sector in the next couple of decades? This brief should recommend a long, hard and rigorous look at the capacity margin in the next two years.

Of course on the climate change side of the department the issues are no less serious as the new government will be taking part in the Conference of the Parties (COP) meeting in Paris later in the year where the subject of an international agreement on emissions reduction is, once again, on the agenda.

Here things seem a bit more positive in that the leaders of the Conservatives, Labour and Liberal Democrats parties have signed a joint pledge. This didn’t get much coverage as it was swamped by a megaphone debate on tax avoidance so I thought I would provide a link to the agreement, see www.green-alliance.org.uk/resources/Leaders_Joint_Climate_Change_Agreement.pdf

When I step back and think about the next few weeks I am reminded of the alleged Chinese proverb “May you live in interesting times”.

On 3 March, the EI will be hosting a pre-election energy question time in London with representatives from the political parties. This debate will provide delegates with the opportunity to engage in the discussion and express your own views on energy policy issues.

Access requires action

I have been reading an excellent report from the Shell Foundation ‘Accelerating Access to Energy’. The statistics are challenging. Here are a few:

1. Low income households in Africa spend up to 40% of their income on energy.

2. 1.2bn people lack any access to reliable and affordable electricity and for another 800 million the grid is unreliable and unpredictable.

3. Half the children in the developing world go to schools that have no electricity.

The Shell Foundation, through many years of experience have adopted what they call the “enterprise based theory of change”. This has involved identifying and tackling market failures, helping create social enterprises, patient and flexible grant funding and business skills development.

They have now refined this into a six stage process that takes between 5 to 10 years to reach maturity. The first three stages are to catalyse, pilot and create pioneers. The major step is number 4; scale. This involves a mixture of grant money and market revenues. It is this stage that we are getting involved with through Scotland Lights up Malawi. There is good evidence from Kenya and Tanzania that the model of distributing solar lights through schools works well and by about year 3 or 4 of the scaling stage the business can be self funding.

So if you haven’t donated to Scotland Lights up Malawi, the 2020 Climate Group's climate justice initiative yet please think about it, access requires action! You can find more details elsewhere on the 2020 group webiste but remember any personal donations are doubled until 5 February by UK Aid Match which matches any public donation pound for pound.