McCrone: In Energy, Even The Incumbents Say “Viva La Revolucion!”

By Angus McCrone
Chief Editor
BloombergNEF

We are on the brink of a new decade. Now, you might say that the 2010s have been mixed at best – political and social divisions spring to mind – but they have prepared the ground for what looks set to be a low-carbon revolution in energy and transport throughout the 2020s, and beyond.

Normally, revolutions should be regarded with some trepidation. After all, Malcolm X once warned: “There is no such thing as a non-violent revolution.” And Mao Zedong remarked menacingly: “A revolution is not a dinner party, or writing an essay, or painting a picture, or doing embroidery.”

Nevertheless, to judge by the mood of the 1,000 thought-leaders and delegates at the 2019 BloombergNEF Summit, held in New York on March 25-26, there is widespread optimism about the business opportunities to come as power generation, transport and much of industry switches to what BNEF calls a “cleaner future.”

Strikingly, that goes for the incumbents just as much as the start-ups and would-be technology disruptors. The Summit heard Maarten Wetselaar, director of integrated gas and new energies at Royal Dutch Shell, say how the oil giant aimed to be the world’s biggest power producer by the 2030s; and Bernard Looney, head of upstream for BP, talking about how the remuneration for 35,000 employees had been tied to company performance on environmental sustainability.

The utilities too: Paris-based Engie talking of becoming the world number one in renewable energy projects backed by corporate power purchase agreements (in other words, the electricity being bought directly by a business, not from the main grid mix); and Minnesota-based Xcel Energy bragging of its pledge to go 100 percent clean energy by 2050.

Of course, the challengers were also very much in evidence in New York. The 2019 New Energy Pioneers, chosen by a committee of experts from a list of 185 applicants from 35 countries, included companies engaged in 3D printing for high-resolution metal parts, CO2 capture in concrete manufacturing, autonomous electric shuttles to provide transport in congested urban centers, and electric planes for short and medium-haul flights.

What is clear is that both the old-established players and the new upstarts will have to contend with a revolution taking place on a much broader front than most people realized a couple of years ago. Not just the themes familiar to previous BNEF Summits such as tumbling costs in wind, solar and electric vehicles, but the sudden encroachment of battery storage into the market of fossil fuel generators, the spread of decentralized power, and “deep decarbonization” in heat and heavy transport, as discussed by my colleague Michael Liebreich a year ago.

Battery insurrection 

The threat posed by batteries to the familiar workings of the electricity system was underlined on the first day of the New York Summit by new analysis published by BNEF. The latest version of our Levelized Cost of Electricity Model showed that global benchmark all-in costs for lithium-ion battery projects have fallen to $187 per megawatt-hour in the first half of 2019, down 35% on a year earlier (client links web | terminal).

The study noted: “Batteries co-located with solar or wind projects are starting to compete, in many markets and without subsidy, with coal- and gas-fired generation for the provision of ‘dispatchable power’ that can be delivered whenever the grid needs it (as opposed to only when the wind is blowing, or the sun is shining).”

Speakers at the Summit added flesh to the bones of the BNEF data. Chris Shelton, president of AES Next, said that storage is “winning in head-to-head bids against gas in the U.S., which is a dramatic statement because gas is so low-cost here.” In the next year or so, four-hour systems would be less than $1000 per kW, “a true alternative” to daily peaking plants.

Calvin Butler, chief executive of Baltimore Gas & Electric Company, told how his utility had put a 5-megawatt battery in one of its sub-stations, enough to postpone – at the very least – the need to build new infrastructure “at tens of millions in cost.”

The following day, Steve McKenery, vice-president for storage at solar developer 8minuteenergy Renewables, said that the collapse in battery prices meant that “many states would never build another gas plant.” To illustrate his words, he took a plastic Swiss army knife out of his pocket, extracting the various tools from it. “Energy storage is like a Swiss army knife,” he said. “The value is not in one functionality, it is in being able to monetize different value streams.”

In the same session, Landon Stevens, policy advisor to the commissioner of Arizona Corporation Commission, the regulator in that state, told the Summit that his organization last year passed a moratorium on regulated utilities building new gas-fired plants. The Commission published an ambitious energy modernization plan including 80 percent clean energy by 2050, and utilities responded by proposing an initial 850 megawatts of battery storage, instead of a big program of building out gas-fired generation.

The rise of storage, along with the ever-shrinking cost of solar, is starting to pose a direct threat to utilities via the option of decentralized energy for businesses, buildings and local communities, literally cut off from the grid.

Ralph Izzo, chairman of Public Service Enterprise Group, the New Jersey-based utility, said that the economics of such distributed resources favored industrial and commercial customers with high load factors, and that their defection would leave other, less intensive electricity users shouldering the lion’s share of utility bills. “This is inviting a public debate that I do not think we are ready for,” he added.

That issue may prove even more acute in developing economies, where at present business customers effectively cross-subsidize low-income residential consumers.

Investors in revolt

They might not be wearing 1789-style ‘bonnet rouge’ floppy hats, but the world’s investors are providing impetus for the low-carbon revolution. Part of this is self-interest. Salim Samaha, partner at Global Infrastructure Partners, told the Summit that “coal-fired generation is generally a bad investment.” He mentioned one particular investment in a coal plant in Chile, made only five years ago: “To use one word, it has been a disaster.”

Bruce Hogg, head of power and renewables at Canada Pension Plan Investment Board, said that his team has been “thinking about the ramifications of climate change on investments”, with coal’s cost structure resulting “in a lot of stranded assets.”

An eye-catching example of the power of institutional shareholders on big companies came in February, when the Church Commissioners for England and “a coalition of investors” welcomed an announcement by giant mining and commodity group Glencore that it would not grow its coal capacity, and was “significantly strengthening its commitment to combat climate change.”

Financial markets are also demanding better data on corporate sustainability performance. At the Summit, Michael Bloomberg, founder of Bloomberg LP, took the stage with Ben Fowke, chairman of Xcel Energy, and Grzegorz Gorski, head of centralized generation at Engie, to launch a Decarbonization Tracker for utilities, showing their progress in transitioning away from fossil fuels.

Investors are important to the revolution not just in what they refuse to back, but also in what they agree to fund. Many have perceived opportunity in owning wind and solar assets over the last five years, albeit almost all in developed economies, and now at least some of them are moving toward taking risk on electricity prices, rather than simply looking for bond-type returns.

Hogg told the Summit that his organization’s “willingness to take commodity risk” gives it differentiation in these markets, unlike some other investors looking at long-term, contracted power plants. “We are looking for higher-risk [opportunities] and that means earlier stages, more commodity, more complex situations, and that means increasingly, emerging markets.”

Heat of battle

Five years ago, even three years ago, low-carbon heat was at best a backwater of the energy transition, and hydrogen was a comet that flared promisingly in the 2000s but had since vanished out of sight. Now both are right back in the minds of investors, technology developers and policy-makers.

Part of this reflects the success of solar, wind and electric vehicle industries in driving down costs to the point where even conservative long-term forecasts, such as those of the International Energy Agency, are showing them winning substantial market share off fossil fuel alternatives in the 2020s and 2030s. That has prompted talk of what’s next – and so what heaves into view is challenging the role of gas and coal in heating, and also in seasonal energy storage for those weeks in Northern Hemisphere winters where the sun doesn’t shine much and the wind is feeble. Hydrogen might be involved in those areas in the future, depending on whether the costs of producing it via electrolysis can be sharply reduced. If they are, nature’s lightest element might find other roles too: for instance, in heavy transport.

A heavily-attended Summit break-out session on decarbonizing heat heard verbal jousting between an electrification adviser, therefore in favor of heat pumps, and an advocate of gas (whether conventional “natural” gas, or some form of renewable gas).

Geoffrey Blanford, technical executive for the Electric Power Research Institute, said that he saw the advent of variable-speed heat pumps having a big impact on the relative economics of electricity versus gas, particularly for buildings that needed cooling in summer as well as heating in winter.

However, Richard Meyer, head of energy analysis for the American Gas Association, argued that electrification faced several hard questions, including whether the use of grid power actually reduced greenhouse emissions compared to using the grid gas, and the impact on the electricity network. In fact, it may not be the first priority: “In New York, a whole lot of fuel oil is still used for heating. It makes sense to bring in natural gas as a lower-carbon solution.”

Timothy Jarratt, head of strategy for National Grid, said that his company is looking at putting some hydrogen into the gas grid. People like it, he said, because moving to hydrogen requires little change in the infrastructure of the home, but the problem is the cost of the fuel – “the cost of hydrogen is currently three times that of methane.”

Transition via LNG 

Revolutions can have their intermediate stages as well as their denouements. In the upheaval threatening the ancien regimes of energy and transport, gas is a halfway house between coal and oil on the one hand, and renewables and electric vehicles on the other. And some trends are powerfully in its favor, particularly seen in the record amounts of liquefied natural gas, or LNG, being exported around the world for use mainly in power generation and industrial heating.

The Summit heard Meg Gentle, president of Tellurian, an LNG project developer, saying that 2019 would be a banner year for global LNG, with forecast growth of 14.5 percent, following 11 percent in 2018 and 10 percent in 2017. “We are bringing 40 million tons of new supply onto the market. We are seeing downward pressure on prices, which is the perfect environment for demand to have a surge,” she said.

She went on to estimate that the U.S. would need to add 100 million tons a year of LNG export capacity, on top of its current 32.3 million tons. “We have not even begun to understand how much stranded gas we have in the U.S.,” she added.

Pierre Bechelany, president of energy and chemicals, LNG and pipelines at infrastructure construction group Fluor, said: “This is a great time to be in the LNG business as a contractor.” He said he saw East Africa, Canada and the U.S. as three locations with an abundance of gas “that we can tap.”

In his presentation ahead of the LNG session (client links: web | terminal), Ashish Sethia, head of commodities at BNEF, spoke of a number of new developments going on in that market. These included increasing use of LNG in trucks in China, and in power vessels that supply electricity to coastal areas around the world, and the growth of non-destination-specific LNG that can be shipped anywhere.

Devouring their own

Revolutions famously devour their own children. Not everyone who spoke enthusiastically at the Summit about the radical changes coming in energy and transport will end up as a winner from the process. Many companies and technologies will fall to Earth over the next decade, or be swallowed by bigger entities.

Clearly, utilities have opportunities in the changes ahead, such as in building and owning renewable energy and storage projects, and in setting up electric vehicle charging networks. They also face serious risks, for instance from the loss of big electricity clients, from stranded assets, and from the impact of climate change itself.

Geisha Williams, the chief executive of PG&E who left in January as the San Francisco-based utility lurched toward bankruptcy a few days later, came to the Summit to talk about the lessons from the wild fires that devastated her home state last summer and fall, and led – via multibillion-dollar liabilities to restore the infrastructure to affected areas – to her company’s crisis.

She said: “It’s time for us to take real action as a society, not just utilities.” She mentioned vegetation management, the ‘undergrounding’ of wires, new roofing codes and mandating defensible space around houses as possible ways to make infrastructure more resilient to the “ravages of climate change.”

The steady march of new digital technologies, such as artificial intelligence, simultaneously presents both a challenge and an opportunity for utilities. They could embrace digital transformation – as Drew Murphy, senior vice-president for strategy at Edison International, proposed – or risk losing out to competitors that do so. However, adopting digital technologies implies spending significant sums – much of which cannot be rate-based – in training workers, buying software, moving to the cloud, or spinning out new business models.  For this reason, Jiong Ma, senior partner at Braemar Energy Ventures, countered that nimble software startups are often better placed than utilities to provide smart home, smart grid, or predictive analytics.

Videos and further details of the sessions at BNEF’s 2019 New York Summit can be found on https://about.bnef.com/summit/newyork/. Many of the topics will be discussed further at our London Summit on October 21-22, Shanghai Summit on December 3-4, and two one-day events, at Munich on May 22 and New Delhi on August 2. We hope to see you there!

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