Thoughts on the energy transition
On the 13th September I was asked to give some thoughts on the energy transition to a gathering at Opus Energy. Here is an edited version of my remarks.
Thank you to Opus for giving me the opportunity to give some of my views on the energy transition. I started work in energy efficiency in 1980 and although we didn’t use the term back then I have been actively involved in the energy transition ever since. We say energy transition these days as short-hand to cover the shift away from centralised, primarily fossil fuel energy sources to more decentralised, cleaner and more flexible energy sources, and all the other things associated with that. We should always remember that there have been other energy transitions; from wood & biomass to coal, from coal to oil, from oil to gas. Those transitions were always driven fundamentally by economics but in the early stages of this transition the driver was perhaps more environmental in nature. Now however we have reached the point where economics are taking over, and that is accelerating the rate of change.
Energy transitions take place over long timescales, fifty to a hundred years. An example of that is electrification. A good pub quiz question is where was the world’s first public electricity system? Perhaps surprisingly it was in Godalming in 1881 and it used hydro power from the river Wey driving a Siemens alternator to provide lighting. That was 50 years after Faraday, in the Royal Institution on Albermarle St, carried out his experiments on electricity. (If you have never been go to the Royal Institution and see Faraday’s actual lab). Fifty years from scientific breakthrough to first commercial innovation is not good for VC funds but in the energy sector it is not unusual. As an aside, interestingly enough the Godalming station shut down in 1894 because it couldn’t compete with gas lighting – I am sure at that point many people wrote off electricity as a wacky, expensive, unreliable, alternative energy source that would never compete.
As fifty years is too long to think about, and as you probably saw on the news it is the tenth anniversary of the collapse of Lehmans it is worth reminding ourselves what has happened in the last ten years of the UK’s energy transition. Ten years ago in the UK there were no solar feed-in tariffs and 22 MW of solar PV, feed-in tariffs were introduced in 2010, and now we have 12.8 GW of solar generating capacity – almost a 90% CAGR. That is an amazing change in the context of energy transitions. Ten years ago the total renewable capacity was about 2.4 GW and now it is 18.3 GW. Ten years ago there was no storage industry other than pumped storage, now people are talking about a possible 8 to 12 GW in the next few years. Ten years ago the Tesla Roadster had just come out and other than that your choice of EV was limited to a G-Wiz which quite frankly wasn’t much of a choice.
If we have to date the start of this energy transition in the UK it would be the introduction of the Non-Fossil Fuel Obligation in 1990 which led to the first wave of wind farms being installed. Back then you could have held a meeting of the entire UK wind industry in the back room of a pub. Since then we have gone from a 4 MW installation at Delabole to 8.5 GW of capacity and wind supplying c.15%+ of electricity with the latest off-shore wind farm having 659 MW capacity alone. We have seen costs of wind and solar fall dramatically, even in off-shore wind where they have fallen further and faster than many of us believed possible even five years ago. The output of renewables has trebled since 2010 and fossil fuel use for generation has fallen by 44%. In 1990 coal was still generating 72% of UK electricity and now we celebrate days without coal.
One of the constant factors of energy transitions is that the establishment and the energy sector itself consistently gets it wrong – in the same year as the Godalming electricity system was installed, 1881, the Chief Engineer of the Post Office, one of the top technical brains in the country, said “Electric lighting is a completely idiotic idea”. I suspect he had shares in some coal gas lighting company – they were an important element of the stock exchange of the day and shares fell sharply once electricity started to take market share.
When in 1911, Winston Churchill, as First Lord of the Admiralty, began to switch the navy’s battleships from coal to oil power, he did so in the face of withering scepticism from the establishment. One of his predecessors had stated that “the substitution of oil for coal is impossible, because oil does not exist in this world in sufficient quantities”. Government and energy industry forecasts in the UK and globally have been proven to be unreliable, in fact worse than unreliable, they have been terrible.
Of course talking about the government making mistakes inevitably leads us to nuclear power. Political power and electrical power have always been closely linked and there is no closer link than in nuclear power. Politicians are like magpies, they are drawn to bright shiny objects and the latest one is Small Modular Reactors, SMRs. To anyone promoting SMRs I always quote Admiral Rickover, the pioneer of nuclear power in the US Navy who said:
“An academic reactor plant almost always has the following basic characteristics: (1) It is simple. (2) It is small. (3) It is cheap. (4) It is light. (5) It can be built very quickly. (6) It is very flexible in purpose. (7) Very little development will be required. It will use off-the-shelf components. (8) The reactor is in the study phase. It is not being built now.
On the other hand a practical reactor can be distinguished by the following characteristics: (1) It is being built now. (2) It is behind schedule. (3) It requires an immense amount of development on apparently trivial items. (4) It is very expensive. (5) It takes a long time to build because of its engineering development problems. (6) It is large. (7) It is heavy. (8) It is complicated.”
SMRs fit firmly into the category of academic reactors and are just the latest bright shiny thing that has attracted the interests of politicians but won’t deliver on the promise. Hinckley Point fits the description of a practical reactor.
Especially given Brexit we should not forget that this is a global transition and that in emerging economies the problems and opportunities are on a scale that dwarf the UK’s. My company, EnergyPro, has a JV with EESL, the Indian publicly owned ESCO and we have deployed £60m of capital in the UK over the last year. But this week I have had meetings with an Indian delegation accompanying the Minister of Power discussing various programmes in India including the national plan to install 250 million smart meters, all pre-pay and all payable by mobile phone, in the next few years using the Meter Asset Provider model. This is a huge opportunity for providers and funders of meters. India also faces a massive issue in meeting demand for cooling. If Room Air Conditioners are adopted at the same rate as they were adopted in China India would need 300 500MW power stations just to meet the incremental demand of the Room Air Conditioners. That clearly cannot happen, so India has a national cooling strategy and we are using UK expertise and technology to provide trigeneration solutions. Other innovative UK cooling technology providers such as Dearman are active in India. Wearing a UK export hat the opportunity to provide technical and financial expertise is huge.
To finish up, let’s look forward ten years, out to say 2020. Some of the key trends which I expect to accelerate include:
At the macro level the decoupling between GDP and energy use will accelerate. The firm link between GDP and energy use used to be axiomatic but in the UK, the US and elsewhere a decoupling is occurring.
Demand for energy will be cut faster than expected, and demand for fuel will start to be impacted by EVs. We will see peak oil, but that means a peak in demand and not the old idea of a supply constraint.
Renewables will be cheaper than fossil fuels in most situations – and subsidy free models will make money.
The old model for running a grid that there is Base load and then you add in more flexible sources as demand increases is dead. You will have a situation where the really valuable element is flexibility is flexibility itself which can be provided through, storage, demand response, local generation and energy efficiency.
All that means adding intelligence to dumb assets to make them better performing, more profitable and greener. This merging of infrastructure and technology – Infratech – is behind a lot of the energy transition and still has so much more potential. There are a lot of dumb assets out there – and I don’t mean the one in the White House.
Prosuming – the idea of both consuming and producing energy will spread further in the industrial, commercial and residential sectors. It will be harder and harder to draw a line between the electricity industry and buildings, industry and homes. It will be one inter-connected system, multi-directional and increasingly distributed.
There will be a move away from single technology solutions – end users just want service and actually don’t care about energy itself so we will see hybrid solutions – CHP, batteries, solar etc. coming together in new energy as a service business models.
Digitisation will enable new services and business models, and allow energy companies and regulators to really measure the effects of energy efficiency and demand response programmes in time and location. We are working with a US company called OpenEE which is enabling pay for performance models for energy efficiency programmes and making efficiency a reliable, distributed energy resource just like a generator. This, along with standardisation of projects and performance insurance, will transform energy efficiency from being the forgotten sister of energy policy and investment into a major growth sector.
Finally electrification of ground based transport is inevitable – it is just a matter of how quickly it happens, twenty five years or fifty years. In the meantime easily available technologies like higher efficiency engines and CNG for trucks will have an interim role to play but ultimately electrification will beat all other solutions.
In conclusion; the energy transition has now entered its major growth and consolidation phase, everything that has happened over the last two to three decades has just been the appetiser. The pressures from end users and capital wanting better, more efficient, greener solutions, plus technological change, are now all acting to accelerate the transition even further into the mainstream. These developments will challenge all of the fundamental assumptions behind our energy institutions, markets, business models, regulators, and industrial structures and we will have to change them all.
So, having participated in the first thirty years of this energy transition, I am hoping to see the next thirty years and in thirty years I think we will look back and be amazed how far we have come. I hope to work with some or all of you soon to help make some of that future happen.