The three S approach to uncertainty

Ian Marchant

Ian Marchant FEI, Immediate Past President

Life seems to be getting more and more uncertain. We are being warned about a Brexit rollercoaster and the oil price, at least in percentage terms, seems to be doing a good impersonation of an elevator; up one minute, down the next. All this uncertainty makes decision-making complex , especially when they concern long-life assets.

Against this background I have been thinking about the question of energy independence. Whilst, in my opinion, this isn’t necessarily a good goal at the national or even local level in its own right, I do believe that investing to reduce one’s dependence on and exposure to both the volatility of the global energy markets and the resilience of local energy distribution systems is something to be considered.

This is where, I believe, a combination of three Ss comes in: solar, storage and software. The cost of solar panels has come down enormously over the last ten years or so but the economics still depend upon support mechanisms, partly because of the profile of solar production. That problem will always be with us and that is where storage comes in.  Installing a suitably-sized lithium ion battery in the home or office allows much more of the solar power to be used on-site and this significantly improves the economics of the whole installation. The third leg is energy management software that can optimise on-site demand (which could include decisions on when to recharge a plug in an electric vehicle), to match the availability of locally produced or stored electricity. The same software can also be used to decide when electricity should be exported and when imported from the grid, an increasing source of value as we move to time of day pricing. Finally, the same software can work out when the stored energy can be used to provide support services such as frequency response to the local grid or through aggregation to the national grid. It really is the combination of the three that makes all this work.

Investing in solar, storage and software may not mean complete energy independence but it will certainly reduce exposure to energy uncertainty and will be an increasingly good investment in its own right. We are seeing commercial offerings starting to emerge in this space and I’m sure there will be more to come.

Small is beautiful

Ian Marchant

Ian Marchant FEI Immediate Past President

The book Small is Beautiful by economist E F Schumacher was originally published at the time of the 1973 oil crisis. To quote Wikipedia “It is often used to champion small, appropriate technologies that are believed to empower people more, in contrast with phrases such as bigger is better”.
I think these words could usefully be applied to the challenges facing the energy industry today when we are facing different challenges that may, with the benefit of hindsight, look like an energy crisis.

The last hundred and fifty or so years have seen the energy industry fixated with bigger is better. It has been about the larger power stations, heavier and deeper offshore platforms and bigger companies. I think this is, however, yesterday’s trend. The future is smaller, more distributed and local. Here are four illustrations.

  1. More and more homes, schools and offices are fitting small solar systems and now this is frequently being combined with local storage. You can now install lithium ion batteries that are smaller than conventional gas boilers which means that all of your solar produced power can be consumed on-site. These are small, personal decisions which are democratising and disrupting the big centralised electricity system.
  2. The rise of unconventional oil and gas has transformed the economics of the fossil fuel industry. Regardless of the controversy around fracking, one thing is clear. These wells are quicker and faster to develop than the pieces of giant industrial architecture that dominated the industry until recently and this is changing the nature of the commodity cycle and the politics of the energy industry.
  3. Even the nuclear industry is being affected. If the 1600MW Hinkley Point C ever gets built, I suspect it will mark the final death throes of the bigger is better mentality. The focus is now on so-called small modular nuclear reactors which may be a fifth to a quarter of the size of Hinkley and stand a sporting chance of being connected with words not normally associated with nuclear power; ‘on time and on budget’.
  4. The market share of the big energy suppliers has been in steep decline recently and we have seen the emergence of a range of smaller competitors with different business models as well as the growth of collective and mutual owned energy suppliers. I suspect that this trend is going to be a consistent feature of the market.

The challenge for the energy industry will be how it copes with the disruption that is bound to occur as we move from a bigger is better world to one where small is beautiful and diversity of scale is a strength.

Renewable energy: an uncomfortable position

Ian Marchant

Ian Marchant FEI, Immediate Past President

I have been looking at how the UK is doing against its EU renewable energy targets. These set us a target of having 15% of all energy from renewable sources by 2020. The government would have us believe that all is well. It’s most recent report (published in January) took great delight in saying that we comfortably met the interim target up to 2013/14. But is that really the right measure? Interim targets are just that: interim, and it’s always tempting for them to be made easy to push trouble down the road to someone else’s term of office. So let’s look at where we actually are in terms of our final target, against the rest of Europe and against long-term requirements. As you might expect, this gives a far from rosy picture.

Firstly, let’s look at how we have done. The baseline for the new targets was 2004 and in that year we achieved a pathetic 1.2% of energy from renewables. After ten years and by 2014 it was 7%. Some simple maths puts this into context. We needed an increase of 13.8% in 16 years and we have managed 5.8% in ten years. In over 60% of the time, we have managed 42% of the target. If we carry on at the same rate, we will only hit 10.5% from renewables. In fact, according to leaked internal government correspondence, they privately think we may only get to 11.5%. I have seen some analysis looking sector by sector and technology by technology which gives a range of 10% to 11.5%. That doesn’t look at all comfortable.

Secondly, let’s see if the international picture gives any comfort. The EU actually has an overall renewable energy target of 20% and has agreed country by country targets within this, with the UK having a lower than average figure of 15%. The EU have recently published a progress report and nine countries have already achieved their final target (no interim target nonsense for them) and we are third furthest away from the end goal (only France and the Netherlands are further away). Despite the government’s trumpeting, our 7% only ranks us 24th out of 27. Outside of Europe we are behind most other countries including Canada, Mexico, Switzerland and even the US. We are level with Australia and ahead of Japan and Russia. Being near the bottom of international league tables doesn’t feel comfortable.

Thirdly, let’s think about where we are against the long term. I hear DECC ministers talking gleefully about the deal they secured in Paris. Leaving aside the UK’s role in securing anything, by 2020 we will be one third of the way from 2004 to the 2050 deadline by which time the global leaders expect the energy industry to be largely carbon free. I can’t see how that can be achieved without renewables contributing over 50% to the energy mix and, at the current rate of progress, even if it is maintained for another 34 years, that suggests we will only get to around a quarter. So the long term doesn’t provide much comfort either.

All three perspectives feel uncomfortable and whilst progress in 2015 may be quite good, this was before the current government’s attacks on onshore wind and solar. One final bit of analysis – it is possible to turn the UK’s likely shortfall into the electricity output measures of TWhours. On this basis, the shortfall will be between 50 and 70TWh (to provide context, the UK annual electricity demand is usually just over 300TWh ). There are obviously choices as to how the gap could be filled but the UK government has ruled out using more onshore wind and solar and expects to boost heat and offshore wind. Given the UK’s track record on heat (in 2014 we were bottom of the heat pile in Europe), I’m not optimistic and offshore wind, although it’s getting cheaper, will always be more expensive than onshore. I’ve calculated that for every 1GW of onshore wind that isn’t built but is replaced by offshore wind, it will cost the UK £100m every year (that’s 2.5TWh of output at a £40 per MWh cost differential). There’s probably another 6 to 10GW that could be built so the total cost could get to as high as a billion a year.

So we aren’t in a comfortable position at all, however you look at it, and we seem to be making things more expensive and difficult than they need to be. A classic case of not accepting the short term headlines.

Access requires action

Ian Marchant

Ian Marchant FEI, President

I have been reading an excellent report from the Shell Foundation ‘Accelerating Access to Energy’. The statistics are challenging. Here are a few:

  1. Low income households in Africa spend up to 40% of their income on energy.
  2. 1.2bn people lack any access to reliable and affordable electricity and for another 800 million the grid is unreliable and unpredictable.
  3. Half the children in the developing world go to schools that have no electricity.

The Shell Foundation, through many years of experience, have adopted what they call the “enterprise based theory of change”. This has involved identifying and tackling market failures, helping create social enterprises, patient and flexible grant funding and business skills development.

They have now refined this into a six stage process that takes between 5 to 10 years to reach maturity. The first three stages are to catalyse, pilot and create pioneers. The major step is number 4; scale. This involves a mixture of grant money and market revenues.

All these stages require a mixture of philanthropic giving and market activity and over the years I have supported one such charity, Solar Aid, who use a social enterprise, Sunny Money, to distribute solar lights in Africa. I even visited some of their work last year. The primary route to market is through schools and it was really encouraging to hear first hand about the positive  impact on children’s academic studying and health and the parents pockets.

If, like me, your career has been in the energy industry, this sort of thing is a really worthwhile cause to get involved with. There are other similar charities operating in this space and they do a good job.