Blog November 29, 2018 Michael Westberg Utility and Energy Vertical Expert , Tele2 IoT

Energy and Utilities: Era of Disruption

In this post I’ll look at some of the surprising and very positive changes happening in the Energy Sector. If this was a movie script I’d call it something like “The Death of Fossil Fuel and the Advent of Super-Cheap Energy for All”.

Attention! I really look forward to your expert feedback on this blog, since there is a number of issues that I’d like to understand better.

Energy and Utilities will experience a level of disruption not seen since… well, the coming of national electricity grids, in many ways reminiscent of the restructuring of telecoms during the 90’s.

Electrical power generation is now at a fundamental tipping point since, not only because wind and solar renewables has become  economically viable, but also due to them being the primary choice for electricity production, and having a continued rapid cost decrease.

Renewable electricity production costs are as of today (2018) on average, globally on par or lower compared to average fossil fuel-based electricity and these costs are continuing to drop rapidly, with up to 15%-20% per year. (Please read that statement again and reflect on it….!)

In 2017 95% solar and wind power represented 94.7 percent of the net new electricity capacity in the US. The same year UK saw its first 24h without-coal-based-electricity since the Industrial Revolution.

This global shift in the cost of production is happening at a scale and speed most of us would not have predicted even a few years ago, and will have fundamental consequences for the energy sector, for consumers, global politics and society as a whole. It is also really good news for the Earth if we get a rapid move to non-CO based energy.

The end of fossil fuel for electricity generation is finally in sight, and as I postulate below fossil fuels for transportation will eventually be fully replaced. This shift also means a transformation of our Electricity Grids, something which involves a massive use of IoT.

Questions: Do you agree with me? If not: Why?

LCOEs of onshore wind and utility-scale solar PV have, respectively, fallen by 67 percent and 86 percent (since 2010) as the cost of components has plummeted and efficiency has increased – two trends that are projected to continue.

Deloitte 2018

Onshore wind and solar PV generation costs have already fallen 18 percent in the first half of 2018.

Bloomberg New Energy Finance 2018

Globally, on average and (important !) excluding subsidies, “utility-scale” Photovoltaic Solar (PvSolar) and On-Shore Wind (OSW) plants are today cheaper per kWh than conventional fossil fuel plants. Equally important, these costs are continuing to drop rapidly. This has happened MUCH quicker than anticipated and will also have significant impact on other energy-using sectors, such as transport, aviation, industry just to mention a few. A large-scale shift from fossil economy will obviously effect global politics, where the fossil production based economies will become the big losers.

Other new main renewables for electricity production, Off-Shore Wind (OSW) and Concentrating Solar Power (CSP – think large towers with mirrors around them) are also on track to be on-par with fossil within 3-5 years.

Question: To me a +10% per year cost decrease of PvSolar seems likely to continue for the foreseeable future. Your view on this?!

 Costs for other non-fossil energy sources, such as Hydro, Geothermal and Bio-energy are static and the cost/kWh for nuclear is on a slow trend upwards – becoming more expensive.

The actual figures vary quite a lot between markets, due to cost of capital, industrial maturity, legal frameworks andquality of the source (intensity of sun and wind). In many cases, and especially in cases where long-term power generation concessions have been auctioned (Dubai, UAE, Chile), the renewable sources win hands down.

This is global change, at a scale and speed almost impossible to comprehend. It also affects and scales up innovation, in all parts of the  ecosystem: research, technology, manufacturing processes, logistics, project experience, human capital, available funding, political acceptance etc. – with no end in sight. For details I suggest you look into the IRENA report, which provides a wealth of data on these topics.

Example: Enel won a bid in Chile last year provide sun/geo/wind generated electricity at a price LOWER than the cost of fuel alone for the conventional gas & coal plants.

Note that I’m not even including large-scale adoption of household private PvSolar installation in this discussion. The actual cost per kWh will always be higher here, due to less scalability and volume effects in installation etc, but I do assume private PvSolar will act as a strong driver to keep pushing the utility kWh price to the end-users lower.

Question: Why should we subsidize consumer PV Solar installations? Wouldn´t it be better to spend money on the larger, more cost-efficient installations?


So, what will happen with fossil-based electricity generation?

  • My answer is:  a none-to-soon rapid demise, with coal-fired plants as the first victims. Here is how it will play out:
    Investments in new fossil utility power plants will largely cease. Coal plants now, gas-driven plants very soon.
  • More renewables typically translate into less usage of existing fossil generation – i.e. higher cost per kWh – i.e. lower profitability – earlier closure – less value on balance sheets.
  • Investors leaving the sector. What used to be low-risk, long term investments will become volatile, unpredictable and short term. Balance sheets have to be re-calculated. This goes for the entire ecosystem including coal mines.

Basically, we’ll see the inverse of the renewable virtuous cycle, just through economic realities and without even factoring in any political initiatives or regulations,

Question: Do you agree ? If not, why?

 

How quickly will this shift happen?

Well, that is the trillion-dollar question. There are political factors playing in both directions.  Fossil fuel is (still) receiving massive subsidies worldwide and the industry has immense political clout, so we can foresee some very intense lobbying and political struggle.

A 250-year old industry does not just lie down dead overnight, but large-scale disruption can still happen really quickly (read more here)

A rather chilling status report as well a distressing view of how the fossil industry still manage to retain and even increase subsidies can be found at here.  If this gets too depressing you can have more of a feel-good experience with another report, for example this one.

In spite of the fossil lobby, killing off coal should be a nice political option for any politician needing to play the cards of climate-change and pollution. In addition, most countries and utilities should be very happy to become independent from fossil fuels security point of view, characterized by with highly fluctuating prices (=risk) and very often supplied from politically unstable and undemocratic countries (= more risk).

Renewables will account for 64 % of electricity generation worldwide by 2050 according to Bloomberg. My bet, though, is that this will happen even quicker and that  in 2038 we will  look back and be astounded by the speed of change….and at the price-points realized!


Someone said: “Nuclear Power”?

Well, the current actual trend is towards higher cost per nuclear kWh, so unless some dramatic breakthrough happens soon (just how likely is that?) nuclear power will be marginalized too. The sheer project size and time to market for a new nuclear plant from start, combined with the political risks  makes it a questionable investment.


So, what problems or countering forces can we see?

One of the main, and very real, arguments against rapid and massive adoption of intermittent (sun & wind-based) renewables is the cost for handling intermittent and distributed sources in the transmission and distribution networks.

This is very true, but it turns out to perhaps be not quite as bad or as expensive as we thought a few years back.  A few reasons for this:

  • Large scale use of new technologies: analytics, fine-grained weather forecasting, (edge and centralized) and smart inverters, supported by massive IoT connectivity coupled with advanced time and/or load-based tariff-setting, can largely off-set the balancing issues.
  • Storage for balancing is becoming cheaper. Li-Io batteries (a key technology) has dropped 80% since 2010 and the drop is continuing. A combined PvSolar or wind-plant with 4h storage capability will be on par with the very cheapest fossil plant (i.e. low-cost gas-plants in the US) by 2025. In most markets this point will occur earlier and will largely compensate the power-balancing issues.
  • Connecting (using IoT!) already existing battery back-up installations in data-centers, hospitals, industry etc would, according to some analysts, provide most of the balancing resources needed for large-scale renewables. See https://www.fortum.com/products-and-services/smart-energy-solutions/virtual-battery-spring. This indicates that even severe bottlenecks in battery production will not mean major delaying impact, since we already have a lot of under-used storage capacity on the shelf.
  • Better trading system and interconnection of national grids (like the Nordic electricity market) will even out the load across larger geographies.
  • Concentrating Solar Power (even on steep cost-down slope)will reach parity with fossil around 2023. CSP by definition includes storage as part of the installation.

So, the power balancing act goes from “really hard and expensive” to just-another-day-at-work requiring smart investments and processes.

The blockers are not so much technical as regulatory and political. Technologies are available, with rapid improvements, but this can be either blocked or accelerated by what is in the end political decisions on both national and international levels.

Question: Is this too simplified ? Did I miss something?

The other main bottleneck in this energy transformation is the capacity in transmission and distribution networks. We’ll need more large-scale international HVDC links as well as upgrades in all levels of the conventional AC networks in order to handle more dynamic flows of energy from the source to the user .

The trend, as far as I can see is higher electricity consumption, from both industry and consumers, due to a general shift from fossil to electricity. Think diesel car to electric vehicle or carbon-dioxide-free steel production. This also puts more pressure on the current networks.

In industrialized countries (read Sweden)  network upgrades are often hampered by very long approval processes and regulatory issues. In many parts of the world with urgent large-scale need for (clean) energy, like China, India, the African continent etc, the build-out will happen much faster and I believe this is where a large part of the investments in the sector will go.

Overall, there does not seem to be any reason why the rapid drop in renewable production cost should stop. If anything, it should accelerate, given that renewables moves to being the preferred and most cost-effective source of electricity, clean and with low external economic and political risks.

Looking a bit further, assuming that we will be looking at a PvSolar cost of 50USD/MWh (0,05 USD per kWh) in 2019 (Source IRENA, LCOE Global average) and yearly cost decrease of 10% we will reach PvSolar cost per MWh of:

  • 2025: 30 USD
  • 2030: 18 USD
  • 2040: 6 USD (like 10% of today’s cost)

Question: Is this likely? If not, why?

The two later forecasts are of course speculative from my side, but perhaps not that unrealistic, given massive innovation and scaling. The analogy with the price-drops in mobile data services the last 10-15 years is evident. I think we will also see new business models in how energy is sold, bundled and marketed by both current utilities and new players in the field.

Just how massive cost drops like this will play out in the market is outside my competence – I assume the life-time of a new plant will have to be much shorter, so cost of capital would increase on a static market. On the other hand, large parts of the world’s population do not even have access to energy today so there is an enormous potential demand to satisfy that will drive large-scale implementation and further price-drops.

Question: What is your view on this ? Is there any relevant economic model that can apply?


What about the other energy users, like transport, aviation and industry, who all run on fossil fuel that can be really hard or very costly to replace? What will cheap, abundant renewable energy mean to them?

Briefly –since this is a pretty large topic in itself – here is a tentative scenario from me,based on low cost of electricity in the coming years, making large-scale “Power to Liquid” economically viable.

Power-To-Liquid is essentially splitting water into hydrogen and oxygen and combine it with CO2 from the air into synthetic fuels that are direct replacements for their fossil equivalents (natural gas, kerosene, petrol, diesel).

The first sector for this is probably aviation, where there are no other real replacement technologies in sight. I also think the incumbent car industry are very interested in retaining the combustion engine based drive-train, since this is one of their core competencies, with some really unique advantages.

The scenario looks like this:

A barrel of aviation fuel takes about 3,3 MWh electric energy to produce i.e. (21kWh per liter). Given the costs above we get the following energy consumption for a barrel:

USD/barrel      USD/MWh
2025: 97                    30
2030: 57                    18
2040: 20                    6

Today’s price of a barrel of aviation fuel is about 72 USD. If we assume that the current cost of the industry process (equipment, people, transport) for refining the original crude oil (Brent) is about 20%, we could perhaps assume a conservative double 40% for the cost for the Solar to Liquid installation.

Source: The results cited for the US$26 trillion in the direct economic benefits are cumuluative for the 2018-2030 period, whereas the other data points reported are for the year 2030. Source: Garrido, L., et al., 2018.

Cost-parity will be reached in 2031 (depending on the cost of the Brent at the time it could be later or earlier). All based on known technology and also compensating/buffering for any overproduction of energy by wind-power plants.

At this time, which is not that very distant in utility terms, investments in the fossil oil industry will see a dramatic decrease. Probably as soon as it becomes clear to the markets what is happening.

Only by using Power to Gas/Power to Liquids will it be possible in the long term to implement an energy supply fully based on renewable sources without using cultivated biomass for energy. The long-term availability of the PtG/PtL technology is therefore of crucial importance and must be considered in shaping the transformation process.

German Environment Agency report 2016

Question: Do you have more inside info on Solar to Liquid (Solar to X, actually, with X being Hydrogen, Gas etc)? What are the challenges?


Conclusions

Good news! The technology, products and entire ecosystem to move away from a CO2 based economy is available and evolving quickly, with new solutions and components maturing and coming on-line rapidly. This transition is happening due to pure market forces, but needs to be accelerated and facilitated by smart, proactive politics in all relevant areas.

In this sense the future is in our hands and what we need to do as individuals is to push and lobby for relevant policies and political decisions. Since IoT connectivity at all levels is a key enabler of the carbon-free energy systems, this also means that we at Tele2 IoT can play a really important part in this.


Sources and further reading

IRENA  http://www.irena.org/publications/2018/Jan/Renewable-power-generation-costs-in-2017)

Deloitte https://www2.deloitte.com/insights/us/en/industry/power-and-utilities/global-renewable-energy-trends.html

Climate Transparency https://www.climate-transparency.org/g20-climate-performance/g20report2018 (good reference index at the end)

https://www.cisl.cam.ac.uk/business-action/low-carbon-transformation/eliminating-fossil-fuel-subsidies/how-big-are-fossil-fuel-subsidies

https://www.bloomberg.com/news/articles/2018-03-28/fossil-fuels-squeezed-by-plunge-in-cost-of-renewables-bnef-says

http://www.indiaenvironmentportal.org.in/files/file/low%20carbon%20economy%20index%202017.pdf

https://www.jernkontoret.se/en/vision-2050/carbon-dioxide-free-steel-production/

http://euanmearns.com/lcoe-and-the-cost-of-synthetic-jet-fuel/

https://www.umweltbundesamt.de/sites/default/files/medien/377/publikationen/161005_uba_hintergrund_ptl_barrierrefrei.pdf

https://www.umweltbundesamt.de/sites/default/files/medien/377/publikationen/uba_position_powertoliquid_engl.pdf

https://www.sunfire.de/en/

http://euanmearns.com/the-thermodynamic-and-economic-realities-of-audis-e-diesel/

https://en.wikipedia.org/wiki/Carbon_tax#United_States

 

 

 



Michael Westberg
Utility and Energy Vertical Expert
Tele2 IoT