Energy Transition

Remaking our world for the better

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As the rigs come down, thousands of wind-turbine towers are going up generating pollution-free electricity at an affordable price. And it’s not only in Europe—a global energy transition is underway, that has the potential to remake our world for the better.

Generation is only one part of the transition which extends from resources to how we use and value energy. Electrification of almost all forms of energy use is on the horizon. For example, electric cars are hitting the streets. Dozens of models under design raise the possibility of fossil-car production peaking during the early 2020s. Yet while vehicles are going to use a lot more electricity, paradoxically, transport may consume less energy overall. That’s because electric vehicles are around three times more efficient than cars burning petrol, diesel or gas.

Supplying electric cars is only part of the deal manufacturers offer customers. Some manufacturers, like Mercedes and Tesla, are offering customers complementary value, such as batteries, charging networks and solar photovoltaic, or PV modules. In doing so they close the loop from the energy source to the mobility service we obtain from cars. Source-to-service convergence emerging from switching resources illustrates the profound scope and scale of today’s transition to clean energy. Its effects will be far-reaching. Simultaneous reductions in pollution from electricity generation and electrification of consumption will make our cities cleaner and healthier, refreshing urban life. Meanwhile, the transition could, if pursued vigorously, transform our interaction with Earth’s climate, avoiding a legacy of trouble and cost later this century for our children.

Today’s transition

Today’s transition is not limited to those earning electric-car incomes living in cities. Across the developing world, rural markets sell solar PV modules, or panels, between farming implements, China-made clothes and fresh vegetables. Similar modules are used in million-module solar power plants taking shape in places like Chile and China, the UAE and the US.

Such flexibility is remarkable for electricity generation, stimulating innovation in business from sales in German post offices last decade to leasing across the US in this decade, and prepay models inspired by the mobile communications revolution. Indeed, just as billionaires and motorcycle taxi drivers in Bangkok use the same smart phones, rich and poor roofs alike are being plastered with solar modules.

The diffusion of solar bears further comparison with mobile. In India and Myanmar, for example, access to mobile and solar is expanding rapidly, in parallel. Shops under one roof are selling solar modules, mobile phones and electric motorcycles. In some developing countries, solar is already more common in the countryside than in towns and cities. Worldwide, a billion people, or more, are leapfrogging from letters and telegrams to mobile and social media, powered by rooftop electricity displacing kerosene lamps. No need for the 20th century webs of wires strung nationwide, at great cost, to transmit telephone calls and electricity.

From global to local, consumer to prosumer

Solar power’s take-off in villages across the developing world as well as suburbs of developed countries complements and competes against thousands of central power plants, mostly burning fossil fuels. Localising electricity production is one of the most profound aspects of today’s energy transition disrupting century-old assumptions in at least two ways. One, the structure and character of supply is fundamentally changing because consumers and investors increasingly own distributed solar electricity production, drawing market power away from the old utilities. Two, planning is becoming decentralised as lots of consumers decide how much they will invest in producing electricity and increasing efficiency.

By the 2020s the convergence of electricity production with consumption among households and firms could be commonplace even without solar. Start-ups along with data and energy giants, like Apple and Google, GE and Schneider, are forging ahead with software and devices to remake electricity consumers as prosumers. The emerging combination of digital meters, real-time data, and third-party services makes offering cash or credits to dim lights or switch off an appliance at peak times simpler and faster. Parallels might be drawn with Airbnb or Uber whose services release hidden value.

Digitalisation can automate adjustments of demand in a fine-grained way across millions of consumers, previously too costly and difficult to coordinate. A slight reduction across every household may go unnoticed but adds up to a big impact on power supply, system stability and energy sustainability. Savings could be substantial. It is usually cheaper and faster to reduce demand then build more power plants, that can easily cost a billion dollars each.

Some, perhaps many, prosumers will be remade as traders of their electricity or demand flexibility by peer-to-peer internet platforms, like those already widely used to create value by sharing files or streaming music and video. Peer-to-peer electricity markets being piloted in the UK, Germany and elsewhere let prosumers decide how much to sell at what price and when to whom.

Prosumers, a product of convergence empowered by distributed solar and batteries combined with digitalisation, could diverge into many niche markets expressing a wide range of needs and ideas of value. More so where local power systems emerge optimised for transmitting electricity between consumers and prosumers. Microgrids, local or virtual, serving communities can operate independently or interact with larger power systems. Microgrids can also offer more options for investing in energy efficiency or expanding electricity production, through local solar or wind for example. The emergence of microgrids looks likely to create not only more jobs locally, but also opportunities for complementary products and services made possible by digitalisation, such as peer-to-peer.

Electricity systems are, in short, beginning to reorganise into cellular structures enabled by a combination of new technologies distributing control and participation across consumers. It is a reorganisation of assets and value driven to varying degrees by consumers, as well as traditional centres of authority such as regulators and utilities.

By contrast, previous transitions moved energy production away from consumers into ever larger power plants, with soaring smoke stacks or great dams, lying at the centre of vast webs of wires supported by huge organisations to manage development, operations and billing. That transformation emerged from transitions to more concentrated carbon energy with lower costs, from wood to coal in the 18th century, followed by oil in the 19thcentury and gas in the 20th century.

Today’s transition, at least for the foreseeable future, is a decisive break from that pattern, a turn from the limited stocks of fossil fuels to the perpetual fund of the solar flux we experience as sunshine and wind. It is a transition from concentrated fossil fuels which flow at rates we control governed by prices and money to resources that flow at rates controlled by nature.

In the old model stored, or fossilised, energy supply was adjusted to follow the ups and downs of demand. In the new model, there will be more scope to switch between adjusting demand and stored energy to ensure smooth supply despite the ups and downs of variable solar and wind. In other words, the locus of control is in transition, shifting from resources to consumption. Controllable elements are multiplying to millions, perhaps billions, interacting digitally. Precision tweaking of performance could reduce emissions and save money, helping to offset the costs of adapting to living with ever present cyber-security risks posed by bugs and hackers.

Transition to the new model is gathering momentum because of a technology pull, people finding new ways, such as harnessing solar power for their household or electric cars, superior to old ways. Today’s transition combines a technology pull, common to previous transitions, with a distinct policy push, far stronger than previous transitions driven by our need to curtail climate disruption.

Today’s pull is unique

Today’s pull is unique because technology is mass-produced rapidly at falling cost, while reducing or eliminating energy bills. All else equal, who prefers variable energy bills to a fixed upfront cost, on terms that are accessible and affordable? Costs for new solar and wind projects are falling at a steady pace such that worldwide they will undercut coal and gas, without preferential tariffs or carbon prices, around 2020. Already, global investment in solar and wind outpaces coal and gas.

Meanwhile the push of policy, a response to rising pollution harming health and destabilising security by disrupting climate, is decarbonising energy use. Policy applies transient short-run measures, like preferential tariffs, to stimulate scaling up and declining costs of zero-carbon technologies, primarily solar and wind. Concurrently, national and global long-run policy aims to restructure energy costs, gradually incorporating the costs of pollution primarily by pricing carbon.

The policy push will intensify as the impacts of climate disruption accumulate over the 2020s and 2030s, moving on to new technologies and harder nudges towards greater energy efficiency. Technologies for capturing carbon dioxide emitted by burning biomass or fossil fuels and sequestering in rocks, such as depleted oil and gas fields are likely targets for policy.

However, policy must contend with politics, building political capital to overcome resistance. To accelerate the scale and speed of transition more ways are needed which maximise short-run private benefits, such as cleaner urban air, and long-run public benefits, like stronger energy security and ending climate disruption. Whether the result is a world entirely powered by sun and wind remains to be seen, although research demonstrates that it is technically feasible. Economic viability is the subject of greater debate. Much depends on efficiency plus our appetite for accepting the risks and costs of climate disruption today and in the future. Previous transitions were incomplete shifts from one form of fossil fuel to another. Globally other energies, such as hydro and nuclear, remain minor sources or face challenges to grow substantially. The question is how much fossil fuel will be needed in the face of falling costs for cleaner power sources as well as storage technologies.

If capturing and storing carbon-dioxide emissions proves safe and competitive, scope for fossil fuels increases. However, from a climate perspective, fossil fuels with carbon capture only help stabilise the atmospheric stock of carbon dioxide, whereas burning biomass and pumping the carbon dioxide back into the earth’s crust will reduce greenhouse gases in the atmosphere, perhaps reversing global warming.

Indeed, carbon capture and geological storage, akin to reversing the current practice of extracting carbon fuels from rocks, could be the future for oil and gas companies, yet so far interest has been lukewarm with industry, in general, looking to governments to underwrite risks and costs of commercialising the technology.

If historical precedents hold, it may take 50-100 years to discover where the energy transition will lead. But this time might be much faster, because of the unique combination of a strong technology pull combined with an intensifying policy push.

The transition may also be faster because we can reimagine and reconfigure, extend and enhance the legacy electricity system rather than invent one from scratch. On the other hand, there are many obstacles to building a new system inside an old one. Innovation has already delivered impressive advances over the last decade, many taking place behind the scenes. Combined with developments within and across fields the results have been rapid improvements in cost and performance of solar and wind power, batteries and power electronics.

If gains continue at recent rates and policy remains on track, today’s transition towards cleaner energy supplies and increased control, for consumers, communities and companies everywhere, might, if we choose, run faster benefitting us sooner by lowering climate risk, improving cities and creating jobs. In other words, remaking our world for the better.

David Fullbrook, Senior Consultant, Strategy & Policy at DNV

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