Uncertain path, or clear destination for the power sector? Energy Reimagined

How will the world transition to a low carbon future? How fast, sustainable, disruptive, broad, and deep will this transition be? After years of trial, error and heavy subsidies, the shift to lower carbon energy sources is accelerating. The number of companies and governments switching reliance from coal to natural gas or to more renewables is growing. But with much uncertainty surrounding the path to a lower carbon future, what will the energy ecosystem look like? What are the choices that decision makers need to make and the actions energy companies need to undertake to respond to changes?

Reimagining the future for the power sector

To reimagine what the future may look like, there are four considerations: economic growth, electrification, decarbonization, and efficiency. The two most critical to the power sector are electrification and decarbonization.

More than 85 percent of the world’s population now has electricity, up from just 77 percent in 2000. Mature markets with stable demand for electricity are transitioning to a more sustainable mix of power generation technologies while continuing to support economic growth with affordable and secure power. Fast-growing markets are trying to meet new demand as their economies grow, as more customers are connected to the grid and as consumption per capita grows.

As more people gain access to electricity, the question is: what form will that electricity take?

The current mix of power generation is carbon-heavy. Yet the imperative to meet consumer demand while concurrently reducing our energy footprint remains strong. Meeting the goals set at the 2015 climate conference in Paris calls for dramatic changes in the type of energy that is produced, how it is produced and the way it is consumed. Thanks to shale gas, natural gas has become an abundant low cost natural resource, raising the question: how can we accelerate towards alternative energy technologies when the existing ones are so inexpensive?

All countries have access to some form of renewable energy, but exploiting its potential will require bold decisions on our future energy mix, more physically integrated energy infrastructure and an environment that allows investment, technology and innovation to thrive.

The transition from scarcity to abundance

The historic energy paradigm was built around the notion of fossil fuel scarcity, limitless demand growth and competition between incumbent players to secure energy supplies. This decades-old paradigm is now challenged by several interdependent factors. Shifts in mobility patterns, falling costs of electric vehicles and solar panels, innovations in battery technology and smart cities all challenge the energy industry status quo.

Most of what has driven the energy mix in the past – comparative cost, reliability and perceived risk – will drive the energy mix in the future. It’s a balance between what customers want, what companies can provide, and what governments will let consumers and companies do.

In developing markets, nations could champion renewable technologies but need funding from government, the World Bank or other third parties. Without subsidies, the alternative is cheap, ‘dirty’, coal generation, which spares governments from putting up prices.

In developed markets, the advent of energy prosumers and advances in electricity storage will accelerate decentralization. The industrial Internet of Things will lead to even greater connectivity between networks and remote applications, and a more refined and sophisticated energy system. Network companies will transport electricity around the network, in multiple directions, rather than from the place of production to the place of consumption, smoothing peaks in demand and guaranteeing supply. By being able to directly control the physical world, systems will fix outages when they happen, without human intervention.

The implications of greater energy choices

As the transition gathers pace, there are consequences for governments, companies, and consumers alike.

• Meeting the world’s growing energy demand will require more than US$48 trillion in capital investment between now and 2035 (IEA). This investment will take many forms, including government grants and subsidies, government-backed debt and equity financing, public/private partnerships, private sector venture capital, private equity, and debt financing. The question is: will the public and private markets be able to meet these staggering capital requirements?
• Advances in PV technology and ramping battery volumes will start to erode the price of combined solar and storage systems, making them attractive for the mass market. Price parity of EVs (projected by mid-2020s) will further exacerbate the trend with cars doubling up as distributed storage systems. With grid-delivered electricity projected to be significantly more expensive than prosumer-generated and stored electricity by 2030, partial grid defection becomes more realistic. Will a price premium for grid-delivered electricity be considered socially acceptable, justifiable by any regulators, or even sustainable from an economic perspective? It will likely require a complete overhaul of the basic functioning of the market in terms of subsidies, corporate identity of traditional utilities, as well as the role and remuneration of power grids.
• Consumers will be at the center of the new energy ecosystem. This will be about the types of power they consume; when they consume energy; how they control it; how to use remote devices to turn power on and off. Energy companies have traditionally focused on assets and not ‘owning’ the relationship with the consumer. Electricity is just a commodity like any other but, as it becomes more technology-enabled, there will be greater scope for telecommunication or consumer products companies to offer energy solutions.

We stand at the brink of a more rapid transformation or a revolution in the industry. We are moving from a centralized model to one where peer-to-peer, self-generation and consumption become the norm. Governments, regulators and energy companies need to reconsider their purpose and role in this new energy era. That is why I am hosting, with my oil and gas colleagues EY’s Energy Summit – Energy Reimagined – a forum to debate the path of energy and discuss leading practices to build a better working world.

For a broader discussion on the energy mix, see our latest point of view. Join us in the future of energy debate at #EYEnergy. For further information visit Energy Reimagined.

For more EY insights on the power and utilities sector visit ey.com/connected.