Reasons to be a bit more cheerful3 September 2018
Capgemini’s Energy Market Observatory report, charting recent developments in the energy industry, suggests that acceleration of the energy transition provides significant opportunities as well as threats. Perry Stoneman, Capgemini.
Utilities are at a tipping point. Thanks to falling equipment and battery storage costs and increasing generation efficiency, onshore wind and utility scale PV costs are now competitive with traditional electricity generation resources in many countries. Globally, more solar generation capacity was added las year than any other technology.
The journey to this point has been painful for utilities. Public subsidies, amounting to $800 billion since 2008, drove the growth of renewable generation just as electricity consumption in the developed world was stagnating because of growing energy efficiency and the financial crisis.
The resulting glut of power generating capacity pushed wholesale prices down to uneconomic levels, negatively affecting utilities’ revenues. Early renewable adopters experienced challenges managing intermittent generation. South Australia was forced to commission both a €333 million gas fired plant and a 100 MW capacity battery in 2017 after several blackouts.
Utilities have had to face up to a lost decade of falling returns, stranded assets and political interference, leaving many in a perilous financial position and forcing significant transformation plans.
A late 2017 auction for solar PV generation plants in sunny Saudi Arabia created a record low cost of only 17$/MWh. Even when considering the additional costs of storage and distribution needed to manage the intermittency of generation, everything now favours energy transition with limited political intervention.
Electricity output costs for solar are predicted to decrease a further 59% by 2025, while offshore wind generation will see a 35% reduction in costs in the same time frame. This is good news for those utilities committed to building a renewable generation business model, such as EDF which in December 2017 announced 30 GW of solar projects in France over the next decade.
However, where there is opportunity there is also threat. The comparative simplicity of solar generation has already kick-started a generation of energy start-ups or RenTechs but perhaps the greater threat to utilities lies with the digital giants. Google, Apple, Microsoft, Amazon and Facebook have all invested in constructing solar parks to provide power to their data centres, building knowledge and expertise that they may well turn to revenue generation in the future.
Technology advances are not the sole preserve of renewables. Utilities are increasingly using digital technologies, such as the Industrial Internet of Things (IIoT), to enhance the efficiency of coal and gas fired power plants, reducing both the cost of generation and CO2 emissions. A Capgemini study of 200 global utilities showed that typical gains from applying digital technologies to a 400 MW CCGT power plant were cost reductions of 28% in fuel costs, 20% in maintenance and 19.5% in operation.
Early adopters in the US and Europe have already achieved significant financial benefits from digitising power plants – €21 million per plant per year on average. Peer companies in China and India expect to start digitisation projects in the next five years.
We are also seeing clear signals that consumption behaviour will change dramatically over the next decade. A combination of battery technology advances and growing concern about, and regulation around, pollution has seen almost every automotive manufacturer commit its future to electric vehicles (EVs). Falling battery costs will mean that, in most countries, EVs will be cheaper to buy and run than internal combustion engine vehicles by 2025.
There were only 2 million EVs on the road globally in 2017 but this figure will increase quickly, changing consumption patterns, driving new grid investments and opening up new business models. In the UK, OVO has already launched an EV tariff and services. Others are considering vehicle to grid models that utilise the local storage capacity that EVs will bring.
At the same time, the increased adoption of smart meters and thermostats and their integration into connected home and building systems is also creating increased customer understanding and awareness of energy consumption. All customers – residential, business or industrial – now expect energy suppliers to help them better manage their energy consumption. Smart home adoption is growing steadily, particularly in the US and Asia, opening up new kinds of home energy, heating and lighting control services to consumers. While advances in micro-generation and battery storage have led to new self-generation packages being developed for the consumer and business markets.
In Germany, residential customers now account for one third of all renewable energy generation. Local energy markets or communities, reliant on small scale generation and virtual trading are being trialled in many countries including the UK.
Incumbent utilities are behind many of these developments but, as with utility scale renewable generation, there are a flood of new market entrants, notably the digital giants, for exampe Google with its Nest business.
While these developments are at a much earlier stage of maturity than renewable generation the direction of travel is clear. Distribution networks will need to be far more flexible and agile in the future.
Regulation and policy need to catch up. It is clear that there is very real need to redesign electricity, capacity and carbon markets to reflect new needs for a flexible electricity supply and demand and to provide relevant price signals that will incentivise investors. Key to this is how policy makers remedy the now dated method of electricity pricing. Unfortunately, Europe’s Clean Energy package is not fully tackling this issue.
While regulation might not provide significant relief in the short term, transformation plans that harness developments in digital technologies can. Maintaining the status quo is no longer an option.
Most of the big European players have launched transformation plans that they are executing with significant focus. We are also seeing North American utilities, where a lower pace of Energy Transition and different market rules had reduced financial pain, follow suit.
These transformation plans generally focus on the downstream business designing and managing new operations and business models. As has been shown by early adopters of gas and coal fired plant digitisation, utilities should also be looking for gains in the generation side of the value chain.
Digital technologies are evolving continuously to provide new solutions. In particular, there is a vast amount of R&D investment going into artificial intelligence and data analytics, the benefits of which remain largely unexploited by utilities. Early pilots in predictive maintenance and customer service are already delivering good returns.
For the first time in a decade, utilities have a good reason to be positive about the future. It is an exciting time to be in the energy sector.
Author information: Peter Stoneman is global head of utilities at Capgemini