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Energy investments of the future

Financing an investment in our future energy system

In a rapidly changing energy landscape, financing is paving a way forward. This article examines emerging trends ranging from digitalization to decarbonization of power systems, exploring the challenges and opportunities they pose for the future of energy financing.

The 2015 UN Climate Change Summit in Paris was a turning point for the energy sector when it became clear that traditional avenues for doing business had to evolve to meet the demands of a changing world. With the clear majority of countries implementing new carbon-reduction goals, traditional power-generation methods like coal are becoming less popular, while more renewable forms of energy, such as wind and solar, will play an increasingly larger role.

Siemens Finance Week Event in Boston on February 15, 2017

         

In the U.S., many states are pursuing efforts aimed at reducing greenhouse gas emissions, encouraging a transition to more environmentally friendly energy sources. And emerging mid-income countries such as China and Mexico have pledged to peak and reduce their total emissions within the coming decade.

Businesses are expected to play a part in helping to reach these goals. That’s why, in 2015, Siemens committed to cutting its carbon footprint in half by 2020 with an overall goal of becoming carbon neutral by 2030 – the first major industrial company to do so. One year into that pledge, Siemens has cut its CO2 emissions by over 20%. This is the result of switching Siemens buildings to more energy-efficient methods of power generation and of enabling clean energy projects. Like all transformations, however, there are investment challenges.

Investment reservations

“In the short-term, investors can initially be deterred by high upfront costs associated with clean energy projects,” says Kirk Edelman, CEO of Energy Finance at Siemens Financial Services (SFS). “Energy projects typically require substantial amounts of capital from multiple sources to develop large-scale energy projects, whether in renewables, conventional power or oil and gas.” 

Over a longer period of time, critical areas such as planning, obtaining permits, securing land, purchasing equipment, and construction are all major factors that can delay projects, underscoring the need for funding from multiple sources. 

The need for new technology

“Success in transitioning to a global energy mix will rely on the implementation of cutting-edge technology, and financing can lead the way,” says Roland Chalons-Browne, CEO of SFS. Siemens’ involvement in Panda Power Funds’ Stonewall plant is an example of the role financing can play. Siemens supplied gas and steam turbines and generators for the project, making it one of the cleanest natural-gas plants in the U.S. For SFS, this was also an opportunity to provide financing that would attract more investors to the project.

The city of Orem, Utah, is another example. Orem chose Siemens’ Energy Savings Performance Contract to modernize its energy services. This project would save the city $11.4 million over 15 years and reduce its energy output. It was made possible through a tax-exempt loan structure provided by SFS through which they would pay back the initial loan.

The deployment of new technologies is one of the catalysts driving the energy transition. While this leads to significant uncertainties, it also offers the possibility to reduce overall system costs, according to a recently published study from the Massachusetts Institute of Technology Energy Initiative (MITEI) titled Utility of the Future.

MITEI Executive Director Raanan Miller says the study’s research was “grounded in the real world” by obtaining perspectives from leaders across the electricity value chain. “The study seeks to provide a framework to enable an efficient outcome for the power system regardless of how technologies or policy objectives develop in the future and is based on analytical assessments and quantitative models,” says Miller. According to the study, decarbonization of the power sector and consumer choice are two other catalysts that will give momentum to energy transitioning. Experts predict consumers will increasingly want to have a say in how electricity is consumed, chiming in on everything from minimizing costs to reducing environmental impact. The study’s authors propose a number of ways to meet this demand, such as the enhancement of distribution regulations and establishing financial independence with distribution companies.

Zakim Bridge, Boston

A more digitized power system

The emergence of information and communication technologies (ICT) is playing a big role in helping utilities fulfill energy demand, according to the study. Digitalization is also making it possible to more actively manage networks, while putting an end to a system in which networks are sized to meet the aggregate peak demand of passive consumers. Dozens of businesses, from start-ups to established providers, will be able to offer increased monitoring and control of power networks as a result.

The digitalization of the power sector does have its risks, though, as demonstrated by the December 2015 cyberattack on the Ukrainian power grid. This is why Utility of the Future’s authors insist on protecting the nation’s electricity grid from a potential cyberattack as a top priority. 

“There is no ‘silver bullet’ when it comes to cybersecurity,” says Miller. “Instead, we need to develop a risk management culture and share information about cyberattacks.” Siemens takes a similar approach when addressing cybersecurity, performing an as-is analysis of a company’s infrastructure and cybersecurity methods. On the basis of this information, Siemens develops a risk management profile to assist operators in minimizing risk and enhancing resilience should an attack occur. 

Financing the energy system of tomorrow

Utility of the Future makes a strong case that action is needed sooner rather than later. “The time is now to establish better incentives for electricity consumers, competitive businesses, and regulated utilities alike, and to improve regulation and market design for an evolving electricity sector,” says Miller. As part of its ongoing commitment to help make this transition as smooth as possible, Siemens is proud to partner with MITEI to explore the important role of financing in advancing the global energy system. One manifestation of this partnership is a special event hosted at MIT in Cambridge, Massachusetts, on February 15, 2017: Financing the Energy System of Tomorrow. 

The event explored regulatory, policy and market reforms designed to enable the evolution of power systems over the next decade. After a keynote by the MIT, a panel discussion including SFS’s Kirk Edelman focused on how flexible financing options can support future power generation infrastructure. Financing the Energy System of Tomorrow took place in conjunction with Siemens Finance Week 2017, a global series of events.

“We’re very excited about this partnership,” says Edelman. “Together with the incredible minds at MIT’s Energy Initiative, we’re looking forward to a stimulating discussion on how financing can lead to a brighter future for the power sector.”

Picture credits: Siemens AG