It is exciting, it is innovative, it’s a utility

For several years meetings of European utilities were a dark cloud of doom and gloom. It was an industry whose core assets suddenly became unprofitable and felt that its social acceptance was crashing even faster than its market capitalisation. Both sides of the debate regarded the utility death spiral as inevitable, the only difference was that the green-renewable side even considered it to be desirable as well.

The mood was very different in Estoril where the industry held its usual annual summit this year. It was not only the beautiful seaside and the excellent Portuguese wine that lifted spirits. There was an unmistakable mood of optimism, acceptance of a deep transformation and openness for new operating models and new partnerships.

The IEA’s contribution to the event and perhaps also to the lifting mood as well was the Energy Technology Perspectives (ETP) which for the first time had a comprehensive analysis of the technology and investment aspects of a well below 2 degrees climate stabilisation. It paints the picture of an energy system in which utilities are not struggling dinosaurs living on borrowed time but powerhouses of innovation playing an essential role enabling clean energy deployment and maintaining supply security.

The climate process is highly non-linear and the impacts of this non linearity are not appreciated enough. Moving from a 2 degrees target to 1.75 which was used to anchor the ETP analysis does not imply reducing emissions just a bit more. It means cutting future emissions further by a 350 billion tons and accelerating the timetable of achieving a zero carbon economy by 40 years, a completely different game.

This can’t be achieved simply by adding even more solar panels for a very straightforward reason: Already on 2 degrees pathway electricity production is practically 100% solar and wind in every sunny and windy hour. Further emission cuts can only be achieved by adding the additional solar panels and windmills and transforming their production. The transformation can be in time, storing that electricity or shifting electricity consumption to the sunny hours. The other, equally important transformation is across sectors: taking the abundant low carbon electricity and bringing it to the sectors of economy where fossil fuels are still dominant, namely to transport, to buildings and to industrial energy use.

The transition to a clean energy system is not a copy paste replacement of fossil fuels with low carbon energy. Even after the recent cost declines of wind and solar, the first and largest contribution is from energy efficiency. On the well below 2 degrees path, total energy consumption of buildings does not increase in the next half century. Given rapid urbanisation keeping the energy consumption of a massively expanding building stock constant will require a focused attention on energy efficiency. Similarly, on the well below 2 degrees trajectory not only vehicle technology changes, but there are overall 500 million less cars compared to the reference case due to the shared economy and smart urban transport systems.

However, what is common between buildings and transport in addition to improving efficiency is a remarkable shift to electricity. Within the stagnating demand, the share of electricity in the energy consumed in buildings grows from one third to two thirds. Personal cars needless to say go electric, but on a low carbon path so do trucks as well, there is not enough carbon budget for those millions of diesel engines. This is likely to be beyond the capabilities of current Lithium battery technology, for heavy trucks a technology competition will unfold between well understood but infrastructure intensive overhead lines, hydrogen fuel cells and new, radically more efficient battery technologies.

Electrification of heat and transport put utilities into an interesting position: an ambitious climate policy is better for the industry than a moderate one. Squeezing conventional thermal power generation by renewables and tightening efficiency standards for electric appliances are among the key pillars for any climate policy. The industry has to do all the hard work just to get to 2 degrees. It is below 2 when the fun begins: the already decarbonised electricity has to be brought into building heat pumps and electric vehicles whose demand impact compensates the further improvement of efficiency. Moreover, demand response taking advantage of the thermal inertia of buildings and the inherent storage of electric cars can emerge as very valuable flexibility assets accompanying the legacy system.

Most of the electricity supply to the system will have to be low carbon, leading to a 60 kg/Mwh average carbon intensity which today is approached only in hydro or nuclear heavy systems like Norway and France. Both of these old workhorses will continue to play a role, but there is no doubt that the real growth will come from wind and solar. They are certainly doing well, with production from new investment reaching almost 1% of global electricity demand annually. However, this is actually less than the average growth rate of global electricity demand, moreover in some important regions aging nuclear capacity faces an uncertain future. Wind and solar is on track to play its role in a diversified technology clean energy system, but it is not on track to go alone and compensating for all other disappointments. Its investment momentum will need to be accelerated further.

A very good news for utilities is that the large majority of wind and solar deployment is as we call it utility scale. Technological innovation leads to larger and larger wind turbines, pushing the technology away from decentralised self-consumption. Decentralised self-consumption is possible and plays a useful role for solar, but even there large utility scale projects represent the majority of deployment and show promising cost reductions. I noticed a clear embracement and enthusiasm about renewables among the major utilities. Arguably, one should no longer talk about legacy utilities and renewable investors as two distinct entities as some time honoured utilities like Enel and Iberdrola are also among the biggest renewable investors in the world. There are of course new entrants even to large scale renewables. Insurance companies and other institutional investors value the predictable cash flow of fixed price renewable contracts, non-energy companies invest to decarbonise their energy footprint. However, most of these new entrants are not interested in operations, maintenance and the real time balancing of the power system. This is true for many private clients as well. There will be people who will take advantage of blockchain to share solar power from their rooftop with the electric cars of their friends, but millions of others are likely to value convenience and simplicity and stick to a one stop shop utility contact. This contractual relationship might move from a one directional top down purchase to a multidimensional “I buy your solar in the summer, sell you wind in the winter, keep your home at 20 C and optimise your electric car” service package. There is clearly a valuable role for someone to step in, invest in and manage large scale assets, aggregate and optimise decentralised flexibility and make sure that the pieces of the puzzle fit together, second by second. I was truly impressed by the innovation at display for new retail models and new flexibility provision from the price driven operation of air conditioning to the provision of frequency control from electric cars. The later will play an especially important role. The transport electrification that the climate target necessitates will create around 10 times the battery capacity than what the wind and solar fleet needs, only that battery capacity will have four wheels. Analysts still often ask the question whether there will be enough storage capacity for renewables, a more relevant question is how to make sure that the abundant storage capacity of the car fleet is optimised to be part of the solution rather than part of the problem. This will require smart charging, smart business models and smart regulation. It was good to see the utilities embracing this and preparing to go all in.

In addition to the utility scale renewable production, the large majority of families with solar panels remain connected to the grid and the large majority of battery deployment provides grid services rather than disconnection. An EV supercharger would need a football field of solar panels running off grid. The spread of renewables and decentralised resources transforms the grid, but does not eliminate its importance, a robust secure and well managed electricity backbone will be one of the key infrastructure assets of the 21st century. The 250 billion dollars capital investment that the grid absorbs annually is way beyond what climate finance, development banks or any source other than private capital markets can provide. We will need to have hard headed investors deciding to put their money into the electricity network because they regard it to be an attractive opportunity. This requires rethinking of regulation: many countries still use a top down model paying network assets on the basis of kwhs distributed down to the consumer. This regulatory approach would fit a 1970s centralised system, but not the complex decentralisation of resources and actors that is coming. The value of rooftop solar is not an administratively set uniform retail tariff which is effectively the case with net metering, it can be very high or very low depending on market situations, weather conditions and network bottlenecks. Efficient price signals will need to be transmitted through the system, orienting technology choices, demand patterns and charging habits.

The electricity industry still has a long way to go. The transition has barely started. There is still need for technology R&D, business model innovation as well as patient long term investment. Mistakes will be made and not all hopes will materialise. Nevertheless, if the 10000 miles journey starts with a small step this first step on the low carbon pathway that ETP mapped is embracing change. This step was taken decisively, good luck and have a good journey.