Renewable energy: an uncomfortable position

I have been having a look at how the UK is doing against its EU renewable energy targets. These set us a target of having 15% of all energy from renewable sources by 2020. The Government would have us believe that all is well. It's most recent report (published last month) took great delight in saying that we comfortably met the interim target up to 2013/14. But is that really the right measure?. Interim targets are just that; interim, and it's always tempting for them to be made easy to push trouble down the road to someone else's term of office. So let's look at where we actually are in term of our final target, against the rest of Europe and against long term requirements.  As you might expect, this gives a far from rosy picture.

Firstly, let's look at how we have done. The baseline for the new targets was 2004 and in that year we achieved a pathetic 1.2% of energy from renewables. After ten years and by 2014 it was 7%. Some simple maths puts this into context. We needed an increase of 13.8% in 16 years and we have managed 5.8% in ten years. In over 60% of the time we have managed 42% of the target. If we carry on at the same rate we will only hit 10.5% from renewables. In fact according to leaked internal government correspondence they privately think we may only get to 11.5%. I have seen some analysis looking sector by sector and technology by technology which gives a range of 10% to 11.5%. That doesn't look at all comfortable.

Secondly, let's see if the international picture gives any comfort. The EU actually has an overall renewable energy target of 20% and has agreed country by country targets within this, with the U.K having a lower than average figure of 15%. The EU have recently published a progress report and nine countries have already achieved their final target (no interim target nonsense for them) and we are third furthest away from the end goal (only France and the Netherlands are further away). Despite the government's trumpeting, our 7% only ranks us 24th out of 27th. Outside of Europe we are behind most other countries including Canada, Mexico, Switerland and even the US. We are level with Australia and ahead of Japan and Russia. Being near the bottom of international league tables doesn't feel comfortable.

Thirdly let's think about where we are against the long term.  I hear DECC ministers talking gleefully about the deal they secured in Paris. Leaving aside the UK's role in securing anything, by 2020 we will be one third of the way from 2004 to the 2050 deadline by which time the global leaders expect the energy industry to be largely carbon free. I can't see how that can be achieved without renewables contributing over 50% to the energy mix and at current rate of progress, even if its maintained for another 34 years, suggests we will only get to around a quarter. So the long term doesn't provide much comfort either.

So all three perspectives feel uncomfortable and whilst progress in 2015 may be quite good this was  before the current Government's attacks on onshore wind and solar. 

One final bit of analysis. It is possible to turn the UK's likely shortfall into the electricity output measures of TWhours. On this basis the shortfall will be between 50 and 70Twh. (To provide context, the UK annual electricty demand is usually just over 300Twh ). There are obviously choices as to how they the gap could be filled but the UK government has ruled out using more onshore wind and solar and expects to boost heat and offshore wind. Given the UKs track record on heat (in 2014 we were bottom of the heat pile in Europe) I'm not optimistic and offshore wind, although it's getting cheaper, will always be more expensive than onshore. I've calculated that for every 1GW of onshore wind that isn't built but is replaced by offshore wind will cost the UK £100m every year ( that's 2.5Twh of output at a £40 per MWh cost differential). There's probably another 6 to 10GW that could be built so the total cost could get to as high as a billion a year. 

So we aren't in a comfortable position at all, however, you look at it and we seem to be making things more expensive and difficult than they need to be. A classic case of not accepting the short term headlines!

We don't want energy storage

Claiming that we don't want energy storage seems like a provocative thing to say. For example the Energy Institute's 2015 barometer, a survey of professionals in the energy industry, rated storage as the area most in need of innovation. My point isn't that energy storage isn't important; it is. My point is that, of itself, it's not something we actually want. You don't hear people say that what they want for Christmas is just some simple energy storage along with some socks and a chocolate orange!! In thinking about the technicalities of energy storage we should first think about what we actually want and I believe we want two things; RESILIENCE and FLEXIBILITY.

Let me illustrate with the energy storage that most of us are familiar with, even if we don't recognise it as such; the fuel in the tank of our car! The typical fuel tank holds 50 to 60 litres of fuel that gives us both instant flexibility even on a cold morning (modern cars start so good at starting nowadays!) and a couple of weeks worth of resilience assuming average mileage. Indeed, if we knew there was a supply crunch most of us could probably stretch that full tank for a month or so by car sharing, using public transport and the like.

So that unseen energy storage which comes free when you buy a car and only ties up £50 to £60 in fuel gives us a lot of resilience and flexibility in our mobility. The energy system that has evolved over the last hundred years or so has embedded within it quite a lot of hidden resilience and flexibility. As well as our car fuel tanks we have petrol and diesel at filling stations and tank farms, we have piles of coal at our diminishing number of coal fired powers stations and we have natural gas in the network of pipes (the jargon for this is linepack), in dedicated storage facilities like Rough and Hornsea and offshore where at some fields production can be ramped up quite quickly. 

However, the energy world is changing. We need to decarbonise our electricity system and then the rest of our energy system. This second stage is likely to increase the role of electricity in meeting our heating and transport needs. The problems are that firstly our current electricity system only has embedded in it the resilience and flexibility that the current uses of electricity need and secondly what little already exists is in decline principally as old coal stations shut.  This is exacerbated by the fact that  low carbon forms of energy, be they renewables, nuclear or clean fossil fuels, are not currently known for their inherent flexibility or resilience. So we will be faced with less of what we need just when we start needing more. What will happen when our electric car battery needs to be recharged at the same time as our heat pump needs to work and we want all our lights and gadgets to function but it's a still calm night?

This is the reason why so many energy professionals put energy storage at the top of their innovation agenda. In deciding on where that innovation should be targeted we need to think about what level in the electricity system we can best provide resilience and flexibility. There are four possible levels, the source of demand (our home for example), the local area (think of the transformer at the end of your street), the generator itself or the grid as a whole. The answer may be a combination of all four levels and, importantly, may be different for resilience than it is for flexibility. It will be determined by things like economies of scale, the efficiency of sharing the capabilities with others (we don't all need to meet our own maximum flexibility, if we can pool with others the flexibility needs of the system will be less than the sum of all the indivdual needs) and the value of providing security close to demand. I have a hunch that the answer may involve local or even domestic level resilience but generator or grid level flexibility but time will tell.

Debate about energy storage tends to get dominated, right from the start, about technology be it batteries, phase change material or pumped storage hydro. However, we need to separately assess our current and future needs for resilience and flexibility, then decide at what level in the system that need can be most efficiently meet and only then determine the choice of technology. We have to put needs before technology. 

The Marchant 3i theory of Innovation

As we face the seismic shifts arising from climate change, demographic forces and the digital revolution the key to future well being will be innovation. This is true for individuals, organisations, businesses and indeed whole countries. There are lots of theories about innovation and what is needed to create an innovative environment but I thought I would add my own fairly simple theory which I have and continue to use to guide my approach to new ideas. 

I believe that any new idea or innovation has to go through 3i stages.

STAGE 1. INVENTION

Everything that is new starts with a spark that comes from a moment of inspiration or as a result of years of hard work. I call this the invention stage and it can occur as part of a plan, such as in a university or a man in a shed,  or it can be the result of serendipity or pure chance. However, some people are naturally good at coming up with new ideas. For example, in the case of one colleague I had to restrict them to 'an idea of the week' as they seemed to have a new idea every time I saw them. Inventors need to be nurtured and encouraged but this spark is not enough for true innovation.

STAGE 2. IMPROVEMENT 

Most inventions do not emerge fully formed but need to be worked on, tweaked and improved. I fall into this category. I can't help but take an idea and try and connect it with other ideas, look for other applications where it could be used or add features or functions to improve its value. I suspect that many leaders and managers fit this mould and indeed someone senior to the inventor may see connections, applications and features that the original inventor isn't aware of. But an improved invention is still just an idea.

STAGE 3 IMPLEMENTATION

It is obvious but surprisingly often overlooked that a good idea actually needs to deployed and rolled out and that requires implementation skills. Tablet computers would have been a concept in science fiction if Apple and the like hadn't manufactured, distributed and sold actual products. Implementation requires more tenacity and endurance than the first two steps and is all too often forgotten.

So three simple steps which I can remember because they all begin with the same letter. My experience is that most people are naturally stronger in one of the three area,  as I said I'm an improver, and the key to creating an innovative environment is to connect different people with the three strengths. This can apply in all walks of life not just business; there can be innovative schools, churches and the like but I believe that they all need these three stages to actual ally lead to an implemented, improved invention. 

Hinkley Point. 10 things I hate about you

The potential new nuclear power station at Hinkley Point seems to be edging closer to starting construction. I feel that I should record my views now so they can be examined by historians when the plant starts producing electricity. I have been inspired by a film title from 1999.

So what are my ten things.

1. PRICE

The headlines keep saying that will be paying £92.50 per MWh for the power from Hinkley but that is in 2012 prices and shows the PR skills of the nuclear industry. It was out of date when it was published and now after nearly four years it must be around £100MWh. That's more than double the current wholesale power price, nearly a third above the cost onshore wind (which the government hates) and is more than any other country seems to be paying for nuclear power. What's not to hate about this.

2. DELIVERY DATE

I remember being told by the CEO of EDF in the UK that I would be able to cook my Christmas dinner in 2017 with power from a new nuclear station. I'm not that keen on Brussels sprouts but certainly not ones that have been waiting to be cooked for many many years. The latest date I've heard is 2025 for first power but I suspect this is just a guess. Put it another way. It's not going to make a difference to the UKs current security of supply crunch.

3. DURATION

When the plant does eventually come on line we will then be forced to pay the inflated price for a total of 35 years which by my reckoning could be over £120Mwh at the start and by 2060 it will be about £200Mwh. We are being forced to take a 45 year bet on energy prices 

4. TECHNOLOGY 

My issue isn't with nuclear power itself, it is that we have chosen to build a technology that is based on 20th century ideas and which isn't exactly problem free. The first two stations of this variety being built in Finland and France are so late and over budget they make public sector projects look well run!

5. SIZE

The new units at Hinkley Point will be 1600MW each which to put into context is four times the size of one of the large coal units or a modern single Gas fired plant. It's 33% bigger than anything else on our electricity system which will cause the network operator some issues and therefore cost in making available sufficient back up reserve. It is interesting to note that the only real time that the transmission network struggled to maintain supply was when the current biggest power station failed.

6. OWNERSHIP

It is a point of note that after leading the world in electricity privatisation we are dependent on the largely state owned EDF and a wholly state owned Chinese company to build this station.

7. WASTE

When I challenged the Government's pursuit of new nuclear build 7 or 8 years ago, in response to one of my questions, I was assured that before we decided on any new plant we would have made the key decisions on handling our existing stockpile of radioactive material. I know proponents say that new nuclear doesn't generate that much waste but surely we shouldn't dig the hole a little deeper before we know what we are doing with the hole. And that metaphor illustrates the problem. We don't know where the hole is going to be and show no signs of making that decision.

8. TRANSPARENCY 

The deals being done to get this plant built will be extremely complex and impenetrable to all but the most expert of energy anoraks. For example, I understand that the contract to deal with the power price and output ( a so called CFD) is over 400 pages long and has never been subject to independent scrutiny and who knows what the terms of the 'sweetheart' financing deal that was done to get the Chinese on board. I do wonder what devil lies in the detail.

9. DECOMMISSIONING 

Whilst it is many years in the future and therefore conveniently ignored currently, at some point the mass of irradiated steel and concrete will need to be made safe. Unlike most other energy production facilities this is not a quick or low risk process and I am concerned that we aren't adequately pricing this future risk (or indeed the risk of an incident during the stations life).

10.  NEED

And finally, do we actually need it? In one sense you can argue that we do to reduce our carbon emissions but there is another perspective. The relentless drive for a new nuclear power station started back in 2006 when experts felt that peak electricity demand in 2015 would be around 65GW (that's a total of 40 Hinkley units for example). A combination of energy efficiency and economic drivers means that actual peak demand this year will only be 55GW (about six Hinkleys less) so even if we needed it then do we need it now?

I may not have convinced you on all ten points but the charge sheet is long and surely a guilty verdict on a few should be enough to make us think again. 

I firmly believe that we should not be building this enormous, expensive piece of old but curiously unproven technology but should pursue the emerging new generation of modular nuclear power stations that will, I believe be deployable in the new few years or so and will be quicker and cheaper to build at a scale that is appropriate to our electricity system. So it's not nuclear power that I hate; its this nuclear power. 

The Marchant theory of investing

Some of us, especially those in the 'second curve' of their careers, are fortunate to have two things they can invest: time and money. I have included both as they are both scarce resources and need to be thought about carefully. I have developed my own theory about investment which applies to both time and money. It draws on the triple bottom line theory which is usual applied to companies and governments but can, I believe, be adapted for personal use too. So what are my three criteria?

1. ECONOMIC 

This is the obvious one but it still worth thinking about. In deciding on the required rate of return on an investment, or indeed on the level of remuneration for a job it is important to think about the real risk attached to the income both in terms of fluctuations in levels, it's durability and any reputational risk that could come from being associated with an organisation. These factors generally explain why people look at investments from a portfolio point of view. So far, all predictable. The interesting part comes from looking at the trade off between an economic return and my next two criteria.

2. IMPACT

We all want to feel that what we do makes a difference and this applies to our use of time and how we invest and spend our money. This impact could be at the organisational level or societal. Let me explain. If you invest in small start up companies, as I have done, you can see clear direct impact through increased employment, product development and positive change in markets. If you give to a charity then you can see societal impacts such as the roll out of solar lights in Africa or increased activity at cancer centres. In many cases you can see both organisational and societal impact and of course there are potential negative impacts which gives rise to things like ethical investment funds or disinvestment movements. I find it helpful to be clear what impacts I would like to help develop and increase and those which I would want avoid and use this as a screen for my use of time and money.

3. INTEREST

I have come to realise the importance of being clear what activities you enjoy and therefore look forward to and those which you don't. I realise this is a luxury and am incredible lucky to be able to pick and choose what I do but I do think that many people in the latter stages of their careers can actively take this into account. It does involve being clear about what interests you and two tests I apply are; do I look forward to doing it and secondly, am I learning from the experience. This second point is really important. I am a big fan of the importance of continuing to learn and stretching yourself. I even came across a psychological term for this used by Carol Dweck, apparently it's called a 'growth mindset'. Education doesn't stop at leaving school or university and experience doesn't stop on leaving an executive career.

If I take these three criteria they can be applied to different types of 'investment'. I will explain three classic ones and then look at new one to me that hits all three criteria. Firstly, investing in quoted shares is primarily an economic decision although I believe that having a societal impact screen is also important, even if it's only a decision on what not to invest in. Secondly, support of charities obviously scores highly on the impact scale but I also think that it is important that you support charities that interest you and where your time or money can make a real impact on the cause. Thirdly, investing in start up companies (so called Angel investing) whilst primarily driven by a hope of an economic return is usually guided by the level of interest in the business area and technology of the new company and an assessment of the impact your investment and mentoring can have. This explains why over three quarters of the investments I have made are in the energy related space.

And so to the new 'investment' opportunity I have recently come across: support of social enterprises. These are organisations that are using business principles to maximise social impact rather than maximise profit. They are often called not for profit but an alternative way to look at it not for loss too.

Under a new government scheme there is tax relief for loans to some of these organisations which means that all three of my criteria can be met; a modest economic return for an impact on an organisation and an issue facing society in an market or place that interests you. What's not to like. I have just closed my first such 'investment' in a community bakery and hope to do more.

The real trick is to look across the portfolio of your investment in time and money and make sure there is a balance between all three criteria; economic, impact and interest so that personally your are achieving a good triple bottom line. 

An Energy Tipping Point

I have been thinking about the long term themes that are driving the UK electricity industry and started by looking back over the last thirty years and then considering what things might look like in thirty years time. I have identified six themes.

1. BIG TO SMALL.

Thirty years ago and indeed until a few years ago our electricity was produced by around 100 large plants, each one of which consisted of a few units of 400MW+. Now there are over half a million small electricity producers ranging from community wind turbines to roof top wind turbines along side a decreasing number of older, large ones. This trend will, I believe, inevitably continue as the developer of any new house, office or factory will be looking to include on site generation. In 30 years time we will have millions of mini power stations.

2. CENTRALLISED TO DISTRIBUTED.

One consequence of the industrial scale of our power plants is that the electricity system became incredibly centralised. A classic example was the concentration of power stations along the so called megawatt valley in Yorkshire. As a result control of scheduling and dispatch was concentrated in initial three, and now one, control room full of smart engineers. This will change as the whole electricity network shifts from an analogue mode to a digital one. The network of 30 years time will be multidirectional, self healing and fully distributed. The smart engineers will be replaced by a smart network. 

3. CARBON TO SILICON.

The industrial era electricity was successfully built on carbon, initially coal and latterly gas. This was largely completed before we realised the long term consequences of CO2 emissions and the link to climate change. The energy industry has been one of the major beneficiaries of the lack of a price of carbon. But this is changing. In the UK we are very very unlikely to see any new coal fired power stations built unless they have carbon capture technology fitted and the pace of new gas stations has slowed to a trickle. Renewables have filled the gap supplying 25.3% of our electricity in the second quarter of this year. The biggest shift in the very recent last has been the rise in solar where capicity is already over 8GW (that's twice the capacity of our largest coal station, Drax). The trend in solar panel prices and advances in technologies like this film solar suggest we are heading into the silicon age. 

4. SUPPLY TO DEMAND 

Energy policy, investment and technology has been focussed on the supply side of the industry. What shall we build, how and where? However, all the disruptive change is now happening on the demand side with home automation, energy management systems and active demand all figuring highly in the new business start up arena. More and more customers, be they large property owning landlords or owner occupiers, are now getting engaged with their energy demands. The new questions will be what  energy do I need, how will I manage it and where should I get it from. When customers take charge of an industry, Revolution happens. 

5. PRODUCTION TO STORAGE

The twentieth century electricity system used flexible production to manage the peaks and troughs of demand. This has lead to demand for services like spinning reserve and stand by generation. These use energy to be ready to supply energy which has always seem a bit odd. This production centric view also leads to the bizarre situation of effectively free marginal cost energy being wasted (wind farms and solar panels being left idle when demand is low). Now one of the biggest areas of energy research is in storage including batteries, phase change materials and physical storage systems. Storage can be at the home level, at the neighbourhood level or connected to the grid. 

6. PETROL TO ELECTRIC 

The internal combustion engine has revolutionised personal transport and petrol and diesel have dominated vehicle fuel. However, we are seeing more and more car manufacturers are releasing all electric and hybrid cars. They are clean, quiet and fast and the range is steadily increasing, especially in the hybrid mode. I now drive a BMW i3 around town and suspect that more and more city cars will be electric.

I believe that, right now, we are at the tipping point in all these themes and realised that a picture could paint a thousand words.

Why do I think it's a tipping point. Mainly because all of theses themes have becoming increasingly clear over the last few years and the changes in digital technology and  awareness of climate change are respectively an enabler and a driver of change. After ten years or so of fits and starts all these themes seem to be gathering pace and are chipping away at the forces of inertia that the old forces have built up. Exact tipping points can only been seen clearly in the rear view mirror but it does feel that, taking the long term view, the future will be a lot different than the past. 

The Future and how to survive it

As part of my monthly reading I catch up with the Harvard Business review and this month I found an article 'The Future and how to Survive it, by Richard Dobbs, Tim Koller and Sree Ramaswamy really interesting. Whilst is it focussed on big macro themes and the long term prospects of large multinational companies I think the responses they outline are equally valid for companies of all sizes so I thought I would set them out. 

1. BE PARANOID. Companies of all sizes tend to focussed internally or on their home market. However, current and future competitors frequently play by different rules. A lesson I have learned is never underestimate your competitor. Assume they are behaving rationally and know what they are doing. Assume they will get their act together quickly and will exploit your weaknesses like you try and exploit theirs.

2. SEEK OUT PATIENT CAPITAL.  My version of this is to make sure you focus on what sort of investor you want as not all money is equal. If your vision is to build a great company over ten years or so then don't get investment from a fund with a three to five year exit horizon. If you want to target capital growth then don't promise a running yield. If you want expertise as well as money seek out the people and funds that can give you the advice you need.

3. RADICALLY SELF-DISRUPT.  To quote "in this era of technology disruption, companies need to be willing to disrupt themselves before others do it to them". Large companies with legacy assets and vested interests find this difficult but small companies can be too wedded to their first idea or product when the market is saying it wants something different. 

4. BUILD NEW INTELLECTUAL ASSETS. Again a quote from the article to illustrate. "Half the world's most valuable brands are in idea intensive sectors......assets such as data, alogorithims and software are also becoming more valuable" I would add assets such as business model innovation, insight on customer behaviour and contact networks.

5. GO TO WAR FOR TALENT. This is true for businesses of all sizes and will lead to radical changes in organisational structures and patterns of working. Two specifics spring to mind. Firstly many small businesses suffer from a shortage of hard sales skills and should prioritise sorting this quickly. Secondly, as a society we need to get better at using the knowledge and experience of people engaged on their 'second career'. We will want or need to stay economically active for longer but business needs to think about how it uses people as they wind down their careers. We have graduate programmes and mentorships for the 20+ year olds. What do we need for the 60+ and 70+ people?

As the article concludes 'vigilance, agility and optimism have always been prized assets of successful companies' to which I would add innovation and forward planning. The future may be challenging but challenging is what brings out the best in the best businesses.