Originally published on World Future Council.
By Anna Leidreiter and Stefan Schurig
How the transition of the global energy sectors challenges the world as we know it. And why this is good news!
Delegates from more than 130 countries and world`s leading renewable energy experts meet for the next three days to discuss the global energy transition. The annual Assembly of the International Renewable Energy Agency (IRENA) has become one of the most important gathering. In fact, the way energy is produced, distributed and consumed in our societies is undergoing fundamental changes. With the majority of energy investments already going into renewable energy, we are doing more than substituting oil, gas, coal and nuclear with free energy from the wind and the sun. We are in fact building an entirely new global energy sector with a completely different DNA.
How does this new DNA of future energy markets look like?
The paradigm shift we are observing is the transition from a vertical to a horizontal structure – from a centralized, hierarchical, supplier-centric energy infrastructure to decentralized, customer-centric and participatory energy models. Most of the existing energy markets are characterized by complex centralized infrastructures, a vertical supply chain, and dominated by few big utilities, whereas future energy markets will be decentralized, with a horizontal supply chain and where benefits are widely distributed among new actors and stakeholders, including individual citizens and small businesses.
An example of this can be found in the Energiewende in Germany: More than one third of the electricity consumption is coming from renewable sources with onshore wind (12%) and solar PV (6%) being the major contributors. If one looks at who owns, finances and runs these new Gigawatts of capacity, one finds that it is primarily citizens, energy cooperatives, farmers and small and medium sized companies that are driving the energy transition. In 2012, 47% of the installed capacity was in the hands of communities and individuals. Only 12% was invested by the conventional energy utilities. And as a German study revealed, projects that were partially or fully owned by local investors generated some 5.4 billion € and created a total of about 100,000 jobs in 2012 in both the construction sector and operation.
Why is it cheaper?
Firstly, energy markets based on renewable sources are cheaper because we build an infrastructure that is paid for by upfront investments and whose fuel is free with small running costs. The DNA of future energy markets is therefore about energy services rather than the supply of fuels and consumption. As the fuel is free, costs for energy generation technologies can be considered as an investment not a running cost. While the conventional energy business model is based on scarcity, depletion, command-and-control monopolies, fossil resource will never be able to compete with renewables, even with a historically low oil price.
This is one of the reasons why the national target of 100% electricity access in rural Bangladesh was implemented almost exclusively with the use of solar home systems (SHS). Solar PV had clear economic advantages compared to conventional sources including diesel. Today, about 18 million people living in rural areas have electricity thanks to more than 3.5 million solar home systems.
Secondly, energy markets based on renewable sources are cheaper because prices for solar and wind technologies drop when demand rises. As we could see over the past years, the learning curve of the technologies pushes costs down dramatically. On the contrary, current business models for oil, gas, coal and nuclear energy are based on decreasing returns as production increases which can be well observed with the low oil price at the moment. When demand increases, deposits are being extracted and prices increase.
Who are the architects of a future energy market?
Across the world, often state-owned utilities tend to monopolize the full value chain from drilling, extraction to distribution. Historically, they have made their profits by ensuring that the market price for energy is constantly high, so that it pays off the high capital investments needed for drilling, extraction and distribution. In this energy model, the price per kWh therefore depends on the project and the technology used and marginal costs are mainly determined by the cost of fuel. The plunging oil price is therefore an economic disaster for the whole sector.
This changes fundamentally with renewable sources. The clearing price of competitive electricity in wholesale markets is lower when solar and wind power plants are included. As utilities are still primarily operators of fossil fuel plants, they are losing market shares and therefore revenues. While the majority of utilities are still in the denial phase, there are some examples that show that the “clean disruption” has also influences in this sector (Tony Seba, 2014). For example, in December 2014 the German utility EON decided to spin off its fossil fuel power plants into a separate company and concentrate on renewable generation, distribution network and provide customers with new solutions and services. CEO Johannes Teyssen explained, “EON’s existing broad business model can no longer properly address these new challenges.” In the press conference, Teyssen explicitly expounded on how renewable energy does not only “revolutionize the electricity production but actually changes the role of the consumer.” One year later, in December 2015, RWE follows.
The architects of this new modular, distributed, bottom-up, open, knowledge based, consumer centric energy system will therefore rather be Silicon Valley entrepreneurs and innovators, who understand the power of digitalization and connectivity and can provide intelligent, smart and innovative solutions.
Will fossil fuel and nuclear power soon be a stranded asset?
In 2015, there were plenty of signals that the world has embarked on transforming its energy sectors sooner than many had expected. Just to mention a few: the G7 mandate for a full decarbonisation in this century, the Paris agreement and the declaration by 1000 mayors to support a transition to 100% renewable energy. These unprecedented events prove even more powerful in the light of the ground-breaking speech by the Head of the Central Bank of England, Mark Carney in late September 2015. Referring to the fact that most of the proven fossil fuel reserves need to stay in the ground to keep global temperature rise below the dangerous 2 degree Celsius benchmark, Mr. Carney stated: “If that estimate is even approximately correct, it would render the vast majority of reserves “stranded” – oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economic”.
In conclusion, for the reasons outlined so far, we are ever more convinced that we have now reached a critical stage in the energy transformation. Fossil fuels and nuclear power are now bound to remain stranded assets not only because they are environmentally destructive or bad for the climate, but more importantly, because they have become a financially NOT viable option for the 21st century. This in itself will help to scale and speed up the move towards 100% Renewable Energy and realize globally what is already happening in many communities, cities and regions: a fossil-fuel free society based on a distributed, customer-centric and participatory energy infrastructure. Just imagine what world would be possible, if we now even learn from the 100% RE champions and make the transition on our own terms, in ways that maximize the benefits to us today and to future generations.
Reprinted with permission.
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