Electric Surprises

Moisés Naím / World Energy & Oil

In recent years, the attention of energy companies, governments, investors and the media has focused on the enormous upheaval caused by new technologies which have made the exploitation of shale gas and shale oil technically and economically feasible, and these innovations have upended energy markets and traditional geopolitical structures. In particular, the United States has become not only self-sufficient in energy terms but also one of the main hydrocarbon exporters. It is not exaggeration to call the changes in the oil and gas industry revolutionary. However, this change has diverted attention from another revolution changing the world, the electrical revolution.

A constantly changing world

The way electricity is generated, transmitted, stored, distributed and priced is undergoing a complete transformation. New business models, financial instruments and technologies, radical changes in consumer behavior and stricter regulations aimed at curbing global warming are just some of the factors changing the face of the industry. But how exactly? Here are some examples that illustrate the profound reconfiguration taking place in the electricity industry: electric cars and large-scale storage systems, consumers who can also be producers, wind and solar farms, whose renewable energy  will account for 35 percent of the total electricity generated by 2035 alongside a boom in electricity demand that will double by 2050. It is worth noting that this boom is asymmetric: electricity demand is falling in developed markets and growing rapidly in emerging markets. Even the most seasoned experts describe this transformation with a sense of wonder. “The electricity industry has changed more in the last ten years than it did in the previous one hundred years. Technological innovations have brought and will continue to bring significant changes that benefit everyone: people, businesses and society,” says Leonardo Moreno, Head of Strategy at AES Corporation, one of the largest electricity companies in the world. Five forces stand out among the myriad of forces fueling this transformation:

- Electric vehicles. The global market for electric vehicles has not yet reached a significant size, but it is poised to grow very quickly, which will boost electricity consumption. Vehicle range has increased to 300 miles per charge, while battery costs have dropped from USD  1000 dollars to less than USD 300 dollars per kilowatt hour. By January 2019, there were seven million electric vehicles in circulation. While this is a significant number, it pales in comparison to the numbers projected by most analysts.  A recent Bloomberg report, for example, estimates that the stock of electric cars will grow to 548 million units by 2040, representing about 32 percent of the world’s passenger vehicles.  While there are still important hurdles that the EV industry must overcome (regulations, safety, infrastructure, etc.), it seems safe to assume that in the long run renewable energy stored in batteries will dislodge fossil fuels as the transport sector’s primary source of energy.

- An explosive growth in electricity storage. The International Renewable Energy Agency (IRENA), estimates that battery storage will grow globally from a current 2 Gigawatts to around 175 Gigawatts by 2030, thanks to a reduction of some 60 percent in the cost of batteries, and this substantial increase will make battery energy storage more significant than hydro storage. Such growth now makes possible around the clock off-grid use of electricity in the residential and industrial markets and provides stand-alone power systems to thousands of previously isolated customers.

- An increasing civic and corporate commitment to a low carbon energy environment. According to the American magazine Forbes, over 100 cities around the world now use at least 70 percent renewable energy, while more than 40 cities are powered by 100 percent renewable electricity. But this push for cleaner energy also extends to corporations. Through the We Mean Business coalition, nearly 900 global companies across all sectors, headquartered in over 45 countries and with combined market capitalization equal to 20 percent of global GDP, have decided to take bold climate action. In addition, RE100 is a global association bringing together business entities committed to 100 percent renewable electricity and including almost 200 global corporations that have pledged to reach this goal by 2050.  This is a significant initiative since companies in the commercial and industrial sectors represent close to 70 percent of the world’s electricity consumers. Investors are also playing a defining and unprecedented role. Some giant institutional investors like California’s CalPERS and Norway’s Norges (the world’s largest sovereign wealth fund) have decided to curtail investments in companies whose business depends on burning fossil fuels.

- The decreasing cost of renewable sources. Over the past 5 years, the costs of solar and wind energy have dropped by 80 percent and now tend to be equivalent to those of electricity generated from fossil fuels, if not lower in some markets. In Chile, Brazil, and several countries in the Middle East, energy from renewable sources is now cheaper than fossil-fueled energy and these low prices do not depend on government subsidies, as was the case just a few years ago.   Furthermore, the falling costs are accompanied by a rapid improvement in storage technology, which allows electricity to be supplied at reasonable prices even in areas where solar and wind energy availability is low or volatile. Therefore, a clear trend is emerging: the gradual replacement of large centralized electrical systems with modular systems located closer to consumers. Microgrids, for example, are local energy grids that can operate either autonomously or while connected to a larger traditional grid.  They provide energy independence, efficiency and protection during emergencies.

- Digital electricity. Digital technologies (predictive analytics, digital twins, smart grid, and artificial intelligence) are transforming every aspect of electricity generation, transmission and distribution.  Combining the machine learning capabilities of Artificial Intelligence (AI) with other digital technologies is leading to unprecedented operational improvement. The combination of blockchain technology and connected devices and sensors is also expected to transform electric energy systems. 

The driving forces behind this transition are the three D’s: Decarbonization, the lowering of carbon in electricity generation through the increasing use of renewables; Decentralization by reducing the number of large, central power stations; Digitalization, made possible by the explosive growth in digital technology. Data from IRENA illustrate the strides being made in decarbonization thanks to the electricity revolution. By 2050, electricity will become the main energy carrier, growing from a current share of 20 percent of final consumption to a 50 percent share, and 85 percent of this demand would be met by cleaner, renewable sources of energy. Such a development would allow carbon dioxide emissions to be reduced by around 60 percent of the amount needed to achieve the climate targets set by the Paris Agreement. Decentralization refers to electricity being generated closer to the consumer (rather than in large and remote centralized plants) thanks to wind turbines and solar panels. The resulting lower transmission and distribution costs reduce the cost of energy. Furthermore, thanks to batteries that can smooth out demand peaks and valleys and lower transmission losses, the penetration of renewable sources, which are by their nature intermittent, is destined to increase significantly. At the same time, the increasing use of digital technologies, such as smart meters, new IoT sensors, networks of remote-control systems and digital platforms, are providing faster and better data both for customers and for grid management and operation. 

The fight for the planet

The explosion of technological innovation in the electricity sector has become an important ally in the efforts to combat climate change.  However, these efforts are not supported by the substantial political commitment needed to accelerate the necessary transition. Energy policies in some of the major countries continue to slow down the efforts to protect the environment. China, for instance, continues to depend excessively on coal to generate electricity and on exporting this highly polluting technology while, in the United States, shortsighted, politically driven agendas are having a negative impact on environmental policies. In its Fifth Assessment Report (AR5), the Intergovernmental Panel on Climate Change, IPCC, set a “carbon budget,” which is the quantity of carbon that can be emitted worldwide before the 2 degrees ceiling agreed in Paris is exceeded. According to the report, this budget will be spent by 2045 unless radical steps are taken to minimize the current rate of emissions. It goes without saying that the electricity industry has been and continues to be a significant driver of the perilous climate trajectory that humanity is pursuing. More, faster and bolder changes are necessary and the electricity sector needs even deeper reforms.  Whether the positive changes discussed here will prevail over the still immense political obstacles that block faster progress remains to be seen. But what is indisputable is that electricity has emerged as the big green hope in the do or die struggle for a cleaner environment. It is imperative to act as our survival is at stake.