William Young, Director of Summit
Bloomberg New Energy Finance
Twitter: @wr_young
“So when any of the four pillars of government, are mainly shaken, or weakened (which are religion, justice, counsel, and treasure), men had need to pray for fair weather.” So said Francis Bacon, the eminent Seventeenth Century scientist and philosopher and, according to one theory, the real author of some of William Shakespeare’s plays.
Bacon’s words about the pillars of government ring all too true today as the world looks on at alarming events unfolding from Greece to Ukraine-Russia, and from Nigeria to Libya. However, I would suggest that the pillars analogy also fits the position of the Twenty-First Century electricity utility, as it faces the disconcerting future discussed at last year’s Bloomberg New Energy Finance Summit, under the headline of “phase change”.
Four pillars that will secure (or render even more insecure) the utility over the years ahead are power generation, grid, the connected home, and the evolution of vehicles – and these will be the main themes of the 2015 Summit, to be held in New York on 13-15 April.
Developments over the last year have been challenging for established utilities in many parts of the world. There have been landmark events such as German utility EON deciding to split distribution and renewables from its fossil-fuel assets; US power producers like Duke and NRG making major investments in 2015 in distributed solar businesses; Tesla Motors moving into the home energy storage market; and NextEra Energy’s takeover of the main electricity company in Hawaii. There has been further evidence of an unexpectedly soft trend in power demand in developed economies, and of course, an eye-watering plunge in oil prices.
Phase change brings dilemmas, and difficulties, but also opportunities. Many of the latter will fall to new players, or those already active in the low-carbon transition, but some may also become available to established utilities, if they can position themselves boldly for the shifts ahead.
The 2015 Summit will see more than 130 of the energy sector’s thought-leaders and some 1,000 senior executives from utilities, the financial community, government and the clean and traditional energy supply chains debate the opportunities in each of those four pillars of the future utility.
In preparing the agenda, we have kept in our minds “where is the momentum building?”, “what is the economic and political sustainability of the opportunities we see?” and “if we’re seeing x, when should we expect to see y, given that y is a natural progression from x?”
We have aimed to be hard-headed – essential when thinking about complex systems, billions of dollars and the provision of services to entire populations – as is implicit in the energy industry. There are two sides to this. Firstly impossible expectations and false deadlines (hyperbole and panic respectively) are the last things anybody needs. Positions founded on the premise that we have “XX months to save the world” are bluffs that should be called – they are as unhelpful as they are ridiculous. Equally, turning our back on the challenges as we perceive them today, because we panic that they are beyond our collective skills to tackle them now and at all times in the future, would be capitulation to fatalism and a failure of nerve.
Another piece of hard-headedness should be to remember that change in a complex system often seems very much as if you are rewiring an aeroplane in mid-flight. Not only do you need to do the rewiring, you also need to make sure you do not drop out of the sky while you are doing it and because you are trying to do both things at once (and there is no auto pilot in this particular plane) the ride can get bumpy.
A third is to do with the speed of that rewiring (in this case the transformation of the energy system). The potential for change can be expressed through a basic equation developed by David Gleicher in the 1960s and refined by Kathie Dannemiller in the 1990s, now known to any student of change management:
D*V*F>R
If the product of dissatisfaction (D) with the current situation, vision (V) for what could be and the first concrete steps (F) to take is greater than resistance (R), then change is possible.
If we look at the energy sector through this lens, it is clear that in some areas, dissatisfaction, vision and concrete steps are helping to drive dramatic and wholesale change – and opportunities. In others, variables in the equation are less strong, with the result that change is slower. Let’s examine each of our pillars – power generation, grid, the connected home and vehicles – in turn.
Power generation: likelihood of change HIGH
In the power generation track, dissatisfaction is brewing, in ways that are varied according to geography. In China, air pollution is a visible and deeply unpleasant reminder of the lack of cleanliness of power generation. In the UK, the apparent lack of ability to influence wholesale gas prices trumps air pollution in driving dissatisfaction. In the US, concerns over air pollution from aging coal operations, and indignation that utilities might prevent homeowners generating their own power should they so wish, are fostering dissatisfaction. In Germany, there is a deep green concern with nuclear waste issues, and a growing base of the population with a stake in renewable energy generating plants. And so on around the world. The vision which is emerging varies greatly by country as local approaches resonate with different audiences. However, a vision of a cleaner, more predictable, less centralised (in some places) generation stack is clear. There are also concrete steps that are being taken towards this vision: trimming generation from plants generating the most pollution (old coal), judiciously enabling the roll-out of cleaner generation sets (solar, wind, gas), securing new and more flexible supplies of natural gas (fracking) and, where necessary, filling the gaps with hard-core baseload generation (nuclear).
Grid: likelihood of change MEDIUM
The population barely engages with the transmission and distribution grid. They see overhead wires and they experience outages during storms. Although this is gradually changing as they seek to send solar power back to the grid and charge their cars, this is still a relatively small community with low engagement. Dissatisfaction comes instead from two other stakeholders – power companies trying to connect decentralised generation and regulators seeking to ensure the stability of the grid in the face of storms and cyber threats. The vision of an intelligent network – able to integrate decentralised generation, manage load at the distribution level more effectively and be more resilient in the face of natural or human induced outages – is emerging. The concrete steps typically involve more investment in poles, wires, substations, smart meters, grid services and “off-grid” mini-networks or in developing countries heading straight to distributed generation, optimised through microgrids.
Connected homes: likelihood of change HIGH
In the developed world, dissatisfaction is running high with utilities as retail-facing businesses with poor customer service reputations and service plan pricing, despite some genuine efforts at transparency. The vision that many forward-looking industry participants (and pioneers among customers) are starting to share involves on-site generation from PV panels, smart devices, grid-connected but not grid-dependent and integrated with advanced management and control systems accessible from web connected devices (smart phones) that, after ten years of being available, almost everyone carries. The first step towards realising this is increasing customer-service orientation in retail businesses, with the gadgets, service levels, communication and operational improvements entailed. The question is whether this can do for the provision of power what EasyJet did for the short haul airline business. There may be an interesting parallel, in that long haul (the mainstay of the longer established airlines) has not disappeared; in fact, it learned lessons from short haul and ultimately became far more efficient.
Vehicles: likelihood of change MEDIUM
In the auto sector, dissatisfaction is limited. President George W Bush once admitted that the US was addicted to oil. That addiction seemed painful with gasoline at $4 or more per gallon, but this is less of an issue when the price has fallen to $2.20 at the pump, and there have been years of striking improvements in the fuel-efficiency of the internal combustion engine. In Europe, the challenge of air pollution in major cities is shining a light on the role of diesel. In Asia, air pollution is central. Cost and availability of fuel is not the problem, at least at the moment. Unusually though, there is a reasonably strong vision emerging about the future of electric vehicles or – more accurately – the connected car, partly due to the well-publicised attentions of the teams at Tesla, Google, BMW and others. Whether you buy the EV or fuel cell future, or not, it is clear that cleanliness and performance of cars is not going away – particularly as the population sees, feels and breathes the effects of dirty cars on a day-to-day basis. Nor will the basic human desire for progress. Improvements in this area will be popular. Unless the costs are prohibitive, something that consumers and governments will carefully weigh as they evaluate drive-train options in the future. In the meantime there are concrete steps for the EV industry – reduce costs, increase mileage, and get a system of chargers up and running and of course, excite potential buyers.
On each of the four pillars, Bloomberg New Energy Finance will be offering at the Summit fresh analysis from its research teams covering such areas as the power system, energy smart technologies and advanced transportation. This will be the hors d’oeuvre for consensus-challenging wisdom from a glittering array of industry leaders and outside experts such as Brad Buss, CFO of SolarCity, Amy Ericson, president & CEO of Alstom US, Al Gore, former Vice President of the United States, Badar Khan, president & CEO of Direct Energy, Michael Picker, president of the California Public Utilities Commission, Maximo Pacheco, Chile’s Minister of Energy, and Audrey Zibelman, chair of the New York State Public Service Commission.
There is one constant issue, as the industry innovates, advances, steps back, and advances again, and that is how to mitigate climate change, adapt to it and at the same time keep populations supportive. Dissatisfaction with the past top-down approach, targets, micro-management and interference has built up, opening the way for an alternative vision in which business and community lead, and bottom-up developments affect the real change. The concrete steps include giving countries time and space to manage their own complex internal politics by dialling down the rhetoric and dialling up the localisation of discussions.
At Summit 2015, we will hear not only about how we are rewiring the plane AND keeping it flying, but also how the on-board engineers (all seven billion of us) might see fit not to bail out or – at least – look for new pilots.
We look forward to welcoming you there.
William Young is BNEF’s Summit series programme director. You can find him @wr_young.
Get updates on the 2015 Summit in New York on 13-15 April from @BloombergNEF or #BNEFSummit. Or look at about.bnef.com/summit.
Later in 2015, for the first time, we will be holding two regional BNEF Summits, one in London and one in Shanghai. Get in touch if you would like to find out more!