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Digitization of the energy sector for a shared future
The convergence of the Internet of Things (IoT), software, big data, analytics, and the growth of renewables, is revolutionizing today’s energy system. A new energy world is emerging, in which digitally enabled services allow opportunities for increased savings and greater efficiencies.
Disruption of our energy system
Two major technology innovations are disrupting our energy system:
As cost curves of renewables are coming down, renewable technologies are spreading. Global power capacity is expected to double by 2040, 2/3rd of which from renewables. In 2018, solar is already as cheap as coal in Germany, Australia, the U.S., Spain and Italy. Its capacity growth in 2016 was larger than any other form of generation. Over next 15 years, solar cost is expected to drop by another 60%, and the cost of wind by 50%.
The adoption of digital technologies in the energy sector is accelerating and changing the way energy is produced, distributed and consumed. Global investment in digital electricity infrastructure and software has grown by more than 20%/ yr since 2014, reaching USD 47 bn in 2016. The digitization of the electricity sector, could unlock USD 1.3 trillion of social, economic and environment value for the sector for both industry and society, through energy services and digital demand.
Energy efficiency disrupted to the next level: The rise of digital demand
The rise of digital demand is unleashing opportunities for increased efficiency at all levels, allowing customers to enjoy the same level of energy services with less primary energy use.
The digitization of the energy sector is providing access to data and real-time information, allowing consumers’ immediate and flexible responses to the systems’ signal. This higher adaptability allows 185 GW of system flexibility globally in buildings/industry & transport combined; allowing customers at an individual and company level to move from reactive to proactive energy management models.
In the building sector, holding 80% of untapped energy efficiency potential, the deployment of building automation and controls for instance, could enable 30%-50% of currently untapped energy savings, with ROI between 2 and 5 years. In infrastructures, digitally enabled microgrids are leading to the emergence of distributed energy resource, storage, and load controls on the demand side of the meter. Such technologies enable sites, such as campuses, office buildings, and even remote islands and villages to run independently from the grid, drawing power from onsite generation.
But “We are not moving fast enough”
The 2015 Paris agreement asserted 175 countries’ commitment to tackle climate change. Yet, two years on, 15,000 scientists from 184 countries issued a letter of Warning To Humanity underlining that we are lagging behind. As confirmed by President Macron, during the One Planet Summit, “We are not moving fast enough”. Business as usual is leading us to a 3 or 3.5 °C temperature increase; with 2017 marking the harshest Atlantic hurricane season with economic damage estimated at between USD 200 bn-290bn.
The finance gap
Investments are shifting towards a more decarbonized and sustainable energy future. Globally, new clean energy investment has climbed to an average of USD 300 bn per year since 2010; 5X greater than in 2004, increasing global capacity installations by 8X (BNEF).
Still, we are not progressing fast enough. The world is currently spending 50% of the required investment level for a 2-degree scenario/ sustainable energy transition. An annual investment of USD 1 trillion is needed in renewable energy and energy efficiency by 2030; $560 billion/yr in energy efficiency investments in the next 15 years—a 50% gap. Traditional bankers and investors are discouraged by the intangible and comparatively small nature of energy efficiency assets and projects. Risk—real and perceived—associated with these projects contribute to the remaining gap in energy efficiency financing.
We need to step up and policy to accelerate the transition
Curbing current CO2 emissions of 36 Gt/yr to 20 Gt by 2040 is technically and economically feasible. It offers some key competitive and economic benefits, and could create up to 1mln jobs in France alone. Innovative financing and new business models are needed to accelerate the change and achieve faster progress.
- New energy financing instruments based on different risk mitigation and blended finance approaches need to emerge to scale up private financing mobilization. Energy Performance Contracting (EPC) for instance, are an effective (alternative) financing option for large energy savings projects, that require no up-front capital costs; the burden of performance and results being placed on highly specialized Energy Services Companies. “Pay as you go” solar energy business models and digital financing present another useful mechanism that can allow low income families to access and pay for better energy services without high upfront costs, (thereby serving the 1.2 billion people still living without electricity.)
- Regulation and policies need to be aligned to accelerate the transition, prevent any halting in emergence of higher flexibility. In Europe, “Clean Energy for All Europeans” is driving a new Market Design for prosumer development and greater role to distribution system operators (DSOs), enabling them to participate in network codes, and a framework for DSOs on the use of flexibility. In China, regulators recently announced plans to pilot ‘electricity prosumer’ model in Feb 2018.
- Along those changes, effective carbon pricing is needed to spark investments in renewable energy and energy efficiency; where currently less than 10% of emissions are effectively priced (at >30 EURO or more) and 60% of emissions are not subject to any pricing mechanism at all (free to emit). The EU Carbon price has plummeted to ~5 EUR/ metric. In January 2018, French President Macron called for a significant EU carbon price floor at a minimum of 25-30 euros.
At the Paris #OnePlanetSummit, enterprises, financial institutions and governments, committed to shift billions and trillions towards a low-carbon future.
But more needs to be done to scale up and accelerate the transition. There has never been a better time to close the funding gap. Let’s turn these commitments into achievements.
The views and opinions expressed in this article are those of the author alone.
