The pressure to decarbonize is massive. The climate COP (Conference of the Parties) in Paris 2015 brought together 197 countries worldwide. Frei admits there still is an ambition gap: Countries have only committed to a third of greenhouse gas reductions necessary. But that doesn’t stop the overall trend, he states. “I think what we’re seeing is that companies understand: If you’re not part of the innovation frontier today, you may no longer be relevant tomorrow.” The efficiency gains needed to reach the Paris goal of a maximum two-degree temperature rise are six-fold in comparison to the past 45 years, Frei explains. Low carbon prices don’t make the job any easier. However, according to Frei, current developments prove that there will be no turning back. “Investors have taken strong decisions, like main development banks getting out of coal. Governments have changed their priorities, and companies, their structures, like E.ON, Engie, or Saudi Aramco.”
Business model transition
Decentralized energy production and digitalization have fundamentally changed the markets, and thus the business models leading to success. Frei says, “We come from a place where the marginal system cost defined the price, whereas today in many instances it’s zero.” In this context, Frei calls for a new market framework that incentivizes urgently needed system services like storage and backup capacity. The fact that gas pipelines could be the biggest storage options available might compensate for lower gas consumption in the future, says Frei. “The gas network could fulfill the same role as batteries do, but batteries are extremely costly to develop while the gas infrastructure is already there. By expanding its range of purpose, instead of an energy-equivalent pricing you could charge the development price of a comparable battery solution – it’s the same gas you used for energy production, but its value as part of a storage solution is so much higher.” Such transition models might be crucial for utilities operating conventional power plants, opening up new, lucrative markets. Also, without such integrated solutions, today’s infrastructure might no longer be financially viable due to the loss in volume and eventually collapse – despite its value.
Managing energy systems in the future
The energy sector is going through a “grand transition,” according to Christoph Frei, Secretary General of the World Energy Council. At the global think tank’s headquarters in London, Frei talked to our reporter Marc Engelhardt about the biggest megatrends driving the changes seen worldwide.
Integrative thinking is more important than ever, according to Frei. “Everything is interconnected: A gas company today, for example, will be directly affected by electricity market design – ignoring the underlying gas infrastructure will be to its own detriment.” Frei calls for global economic and political collaboration on issues from resilience to regional balancing of resources and climate policies, or integrated infrastructure planning in order to minimize uncertainty. Otherwise, the capital needed for the energy transition may be hard to find: Global GDP will be growing much slower in the next 45 years, also due to a decline in population growth – and to decouple energy from GDP further in this slower growth environment will be extremely challenging, Frei warns. “Governments have not become richer over the past years, so investment has to come from traditional and new investors alike: pension funds, development banks, entrepreneurs attracting capital from different sources.” Frei believes that leasing will play an important part, as already seen in storage, rooftop solar, or with cars.
Energy systems worldwide have to become more resilient as they face potent threats, Frei emphasizes: For Europe and North America, cybersecurity is a key risk. In Asia-Pacific, parts of Africa, and Latin America, extreme weather conditions are surfacing as the principal threat, while for the Middle East, Australia, and parts of Africa, the competition about increasingly strained water resources is a main concern. Given the magnitude of some threats – extreme weather events, for instance, have quadrupled in the past 30 years – factoring in security margins is no longer sufficient, Frei says. “It’s the proverbial difference between the oak and the reed: When a storm comes, the oak will fall, but the reed will bend and quickly stand up again once the storm is over. We have to stop building oaks and start to build an energy system that is much more like reed.” He calls for a shift from thinking of fail-safe – looking at single assets only – to safe-fail – focusing on the system as a whole. And it’s already happening: Literally, like the construction of wind farms that lie down in case of a severe storm, and figuratively, like Chinese legislation against “thirsty” energy technology, meant to save precious drinking water.
The speed of change in the energy field is unprecedented, says Frei. “Only three years ago, at our last congress, we were still asking if we have reached the tipping point – this year in Istanbul, it was clear that we are clearly beyond the tipping point in a number of areas.” India’s government pushing for solar energy, Mexico adopting an energy reform or China emphasizing environment over energy access in its current five-year-plan are just some of the developments that Frei refers to. The private sector and investors have followed suit. Frei talks of a new entrepreneurial spirit that could well help to get electricity to the last 1.1 billion people on Earth without energy access. “Today, there are models combining a high-efficiency DC fridge appliance and a cell phone charging station, powered by a 200-watt solar cell which owners pay for on a leasing rate of 40 cents a day over a period of three years, charged through the mobile phone.” The speed of innovation has made energy policy more important than ever: Energy ministries have lately become core government portfolios; the G20 even have installed their own energy ministerial meetings.