4/23/2017 Three ways power utilities are shock-proofing the electricity business | World Economic Forum

3 ways power utilities are shock-proofing

the electricity business

With the rise of renewables, the electricity industry is having to adapt

Image: REUTERS/Stringer

20 Apr 2017

Nigel Topping
CEO, We Mean Business

When Thomas Edison opened his first electrical power distribution center in lower Manhattan,
he was the toast of New York. Well, at least to the 59 customers who happened to be within a
mile radius of Pearl Street.

The limitations of Edison’s DC system left many New Yorkers unconnected from the fledgling
power grid, but those people weren’t going to remain in the dark for long. Competing AC
providers quickly seized the initiative and supplied the untapped demand, igniting a battle for
market share between the rival technologies that left Edison railing against the dangers of
what he saw as an inferior system.

Today’s utilities have a similar challenge of adapting to a rapidly evolving industry. However,
unlike during Edison’s time, today’s utilities have the added challenge of meeting current
demands by harnessing the inconsistent and disruptive power of renewables.

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Renewable power, particularly in the form of solar and wind, is perfectly poised to seize the
untapped demand pools of today. It has flexibility in terms of scale and location, the ability to
operate both with established grids and away from them, as well as cost-competitiveness with
fossil fuels. Add to that the urgent need to decarbonize, and you have create serious
momentum.

But that potential comes with a catch – one power utilities have been grappling with for much
of the past decade. The surge of renewable power into the grid, coupled with its inconsistent
availability, has helped to squeeze returns for incumbent electricity providers in established
power markets such as Europe and the US.

Lost decade of transition

Germany’s two biggest power companies, E.ON and RWE, decided to split into two entirely
separate companies last year in a bid to better capture the business potential of renewable
power. The move provides an apt metaphor for the battle currently being played out between
old and new in the global power markets.

While renewables are not totally to blame for the industry’s “lost decade” of returns, it’s a
factor that can’t be ignored, as strong utilities are key to the widespread deployment of cleaner
power. The industry is also right to point out that the crippling cost of maintaining the grid
infrastructure is a major stumbling block facing the roll-out of renewables. These are problems
that must be addressed urgently as the rise of renewables, and the disruption that it brings, is
only set to intensify.

A recent research program carried out by Climate Policy Initiative for the Energy Transitions
Commission concluded that a power system based almost entirely on variable renewable
energy generation is likely to provide lower cost power than a fossil fuel-based system by
2030, even without a carbon price.

This shift is backed up by policy pledges from the countries signed up to the Paris Agreement,
with certain ambitious nations, such as the 48 members of the Climate Vulnerable Forum,
committing to make their energy production 100% renewable "as rapidly as possible" and by
2050 at the latest. Certain developed countries are also making huge progress, such as
Sweden and Denmark, which are on track to achieve their aims of going completely fossil-free
by 2040 and 2050, respectively.

With this widespread shift to renewables starting to play out globally, the need for utilities to
adapt and fulfil their role as implementation partner is clear. But navigating the complex set of
challenges faced by the industry during this transition is not to be underestimated.

Phasing out fossil fuels

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One of the ways forward-looking utilities are adapting to this challenge is by diversifying their
generation portfolio to include more renewable energy sources and reduce exposure to fossil
fuels.

This shift is taking root globally, beyond the long-established power markets of Europe and the
US. For example, South Africa’s coal-focused power utility Eskom has now agreed to allow
renewable power integration, despite long-standing opposition. Meanwhile, India and China
have seen surging renewable output during recent years, backed by ambitious plans for the
future.

Certain energy producers are leading the way towards a renewable future, such as Denmark’s
DONG Energy. The company initially branded as Danish Oil and Natural Gas has now pledged
to completely phase out coal by 2023 and decided to sell off what remains of its oil and gas
business in order to focus completely on renewables.

A report by Accenture Strategy, based on Carbon Disclosure Project (CDP) data, found that
large-scale low-carbon electricity generators could capture more than $100 billion in avoided
costs annually by managing a low-carbon energy portfolio.

Better storage
Secondly, leading utilities are future-proofing themselves by embracing technology. The
deployment of lithium ion batteries, smart metering and innovative grid-management solutions
such as blockchain have huge potential to balance the inconsistent supply from renewables.

This could help solve one of the industries’ age-old problems of having to meet rampant peak
demand, only to scale back generation drastically in off-peak periods. Not to mention the
developing problem of having too much renewable power swamping the grid at certain hours.

Companies harnessing the power of technology include UK network operator National Grid,
which is investing in 500 MW of battery storage capacity, partnering with Deep Mind to crack
grid-optimization issues and making moves into the solar industry. Meanwhile, Enel’s battery-
storage system on the Mediterranean island of Ventotene, in collaborate with Siemens, shows
the utility sector is ready to integrate batteries at scale.

The Accenture Strategy report found that flexibility optimizers could tap into a $38-59 billion
annual market by optimizing efficiency across the value chain.

Corporations and cities

Thirdly, utilities are reaping huge rewards from more active engagement with corporate
demand for renewables. Companies are sending loud and clear demand signals by committing

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to source 100% of their energy needs from renewables and by engaging with initiatives such
as RE100, by The Climate Group in partnership with CDP.

In working with companies keen to shift their power supply to renewable sources, utilities also
get committed, long-term customers that can help navigate the disruption ahead. Around 90
companies – including major corporate power consumers like Tata Motors – have now joined
RE100.

Urban areas around the world are also shifting to renewable power, as shown by the C40
network of the world’s megacities committed to addressing climate change.

Forward-looking utilities are learning from the original pioneer of power distribution. Just as
Edison eventually came to embrace the competing AC system and turn a challenge into a
strength, today’s utilities are increasingly working with renewables and technology to provide
the power needed for the low-carbon transition.

Written by

Nigel Topping, CEO, We Mean Business

The views expressed in this article are those of the author alone and not the World Economic Forum.

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