The energy revolution is real and we are moving toward the world of the 3Ds of energy: decentralization, digitization and de-carbonization. This was the main theme at the recent FT Digital Energy Summit which the Center for Industrial Development actively participated in. The aim of this article is to unpack the key themes and insights learned from the event.
Andrew Ward – the Energy Editor at the FT and the Chair of the event – acknowledged in the opening remarks that even though the change in energy space is happening, we are constantly faced with the risk of being hyperbolic. Acknowledging this risk, Spencer Dale – the Chief Economist of BP, stated that geopolitics and technology are at the heart of energy issues. Given that both of those forces are not easily predictable, it is difficult, maybe impossible, to be fully predictive of future trends. Electric vehicles, for example, while acknowledged as an important development, will most likely not have a significant impact on global oil demand, according to. The reasoning is that only 20% of global oil demand is used for car-related consumption. While the number of cars globally is expected to double to two billion by 2025, the majority of those will not be electric according to BP.
BP predicts that potential improvements in the efficiency of wind power generation will not emerge from gains on the level of individual turbine. The potential is in using big data analytics for predicting how the wind blows and being able to harvest this potential. Mr. Dale noticed that the total cost of renewables is not limited to its electricity price, but also has to include all the back-up generation capacity for a situation when the wind does not blow, or the sun does not shine. Given the growth of the installed generation capacity of renewables, BP predicts that intermittency of renewables will not be solved anytime soon. Therefore, we are expecting to observe further price spikes. According to Mr. Dale, as big shift is happening thanks to exchange of coal for gas as supply for heat generation. Furthermore, it is clear that the world is electrifying: two thirds of the growth in energy demand over the next 20 years are expected to come from power generation.
BP concluded its presentation with predictions on their core business: crude oil. Its Chief Economist predicted that demand for oil will peak somewhere within the next 20 years. Nobody knows when exactly. However, once oil peaks it will not drop dramatically the very next day. Instead it is likely to plateau at a certain level equal to stable demand. The fundamental difference to the world of oil today and the world from before the shale revolution in the U.S. is that fear of the world running out of oil is no longer valid – today no one worries that we will run out of oil. Demand is the question.
Cross-industry innovation was another key theme of the event. Leo Simonovich, responsible for cyber security at Siemens, confessed that the company’s first exposure to cyber security was not at a conference somewhere, but rather during a cyber-attack on one of the its power stations. Now, Siemens serious about cyber security. It was argued during the presentations that presumably banking and energy are the two industries most exposed to the threat of cyber-attacks. Cybersecurity in energy will be a fundamental concern to any energy system in the coming years.
When asked about the challenges of making digitalization happen in the energy sector speakers agreed with the perception that risks of digitalization are greater than the rewards of the undertaking. The missing piece is trust, as without trust one will never open up to be connected. Therefore, government regulation plays a critical role in setting the right foundation for building trust for digitalizing the energy sector. According to the Global Connectivity Index connectivity in energy is highest among any other sector worldwide. The panelists confirmed that the buzz words of the day, such as machine learning and block chain are fundamentally changing the energy system. It is only up to the leadership of big energy companies to acknowledge those trends, build teams to master those technologies and finally, change their key performance indicators to reflect the new world. As one of the speakers stated, the alternative is simple: if we do not invest in those technologies, then the Chinese will buy out all those promising technologies and the West will lose its competitive advantage for the long years to come.
The panelist agreed that is it crucial to not fear the complexity of digitalization since its security benefits are far too great to not keep up the required pace to realize those benefits. The mindset required for taking the advantage of digitalization is three-fold: listening, learning, and leveraging. Carsten Stöcker from innogy shared an example of introducing block chain in the network of charging stations thought Germany. The system achieved not only significant cost reductions, as virtually all intermediaries were removed from the value chain, but also eliminated all credit risk. Clearly regulators have an important role to play in helping companies embrace digital. However, it is crucial to remember that regulation and compliance does not equal risk reduction, as probability of cyber-attack is always 100%. It only provides a necessary starting point for thinking about security. There are three simple steps companies should take in order to minimize risks of cyber-attacks: 1. Cyber security hygiene 2. Monitoring & visibility and 3. Leveraging ecosystem in order to address the security challenges.
The panel on cross-industry innovation concluded with a clear call to action: the energy sector has to take the expertise it has gathered and apply it to adjacent industries. Energy companies have unique skill set in managing critical assets, why don’t they leverage it outside of the sector? In other words, do exactly what new players in the energy space are doing: question the status quo.
Next session presented case of co-operation between energy behemoth: Shell and a start-up: Maana. The key insight, which emerged from this insightful dialogue, was the fact that start-ups have to work on scalable technologies which can be quickly implemented in bluechip companies. Big companies do not care much about a pilot project, but rather whether technology can scale up quickly and easily integrate with legacy systems. Those two are the main concerns of any big player wishing to work with any start-up.
The afternoon’s session gave the participants of the FT Digital Energy Summit a unique opportunity to engage in a conversation with Jonathan Kini, Retail CEO at Drax. The company is a schoolbook example of how changes in energy world combined with government regulation affect large electricity generators. Due to the decision of the UK’s Government, Drax had to transition its business from coal-based power generation to biomass-based power generation. Moreover, in search of profits, the business has taken a decision to enter distribution of electricity to retail and SMEs segments.
It was noted that expectations in the energy sector are not set by the industry itself, but by other industries and customer experiences in those other sectors, such as telecommunications. Therefore, if one thinks that the sector has time to innovate and adjust to changing customer demands, one can well be proven wrong. According to the speakers, there is very little time for real innovation in the energy space before others will disrupt it.
The following panel hosted two executives from French businesses with distinctively different business strategies: Total & Engie. The former one recently purchases oil business from Danish Maersk, while the latter made a bold decision to completely exit fossil-fuel based generation and therefore prepare for the new era in the energy world. Both companies talked about the importance of working with strategic partners on key opportunities for the business. Total leverages its understanding of the sub-surface while working with Microsoft and Google on leveraging their understanding of the AI. Together the partnership creates completely new value for everyone involved. While choosing its partners Frederic Gimenez, Chief Information Officer of Total, does not want to work with possible competitors. As the business believes that Google is not likely to drill for oil anytime in the near future, it is Google who they work with.
Neil Clitheroe, Global Retail Director at Iberdrola, presented insights into how consumers think about engaging with electricity sector. In fact, the word “engage” is the wrong one to use, as according to research energy is a boring product. Therefore, the customer journey should be made as easy as possible. Otherwise, if we try to “engage” customer, they will only end up annoyed and seek an opportunity to change electricity providers. Neil made a very interesting point that even if you manage to reduce the costs of electricity for the final consumer by 20% that would amount to around 20 cents per day, which is really not a lot to bother final consumer. Therefore, the goal for any electricity provider shouldn’t be to engage, but not annoy consumers. Consequently, strategy of making it as difficult as possible to change providers used by some of electricity providers is simply a bad business approach, as an annoyed consumer will always find ways to change electricity providers.
The second to last panel focused on the topic very dear to the heart of The Center for Industrial Development: how to attract young talent into energy sector. Roland Hess, SVP Applied Excellence at innogy SE, started with asking young leaders what is totally de-energizing for them in the energy sector. It turned out that the way energy sector does recruitment is where the most improvements can be made. Pål Grønås Drange from Statoil remembers job fairs he attended at which he told future graduates to visit Statoil’s website and apply for the job. Compare that to Google, which actively is inviting students to join and work in a cool environment. “I am not surprised graduates decide to work for tech companies over us” summarized Pål. Young leaders agreed that energy companies should actually “do” recruitment: go out and invite students to work for one of the most central industries globally.
It is a fact that access to energy is the driving force behind economic development and virtually everything is made possible by energy. Therefore, energy companies should focus on telling this story and excite youth to work in the world’s most technologically industry. It is crucial to keep in mind that the same holds true for the two other industries The Center for Industrial Development focuses on: agriculture and mining. We encourage you to reach out to us regardless whether you are big energy company looking to attract the best talent to join you, or a young graduate interested in working in any of the three industries we focus on – we are happy to help you as much as we can.
The 2017’s FT Digital Energy Summit concluded with a CEO dialogue. Wilfrid Petrie, CEO at Engie UK & Ireland, Stephen Fitzpatrick, CEO and Founder at Ovo Energy, and Paul Massara, CEO at Northstar Solar, talked about the future of the sector, as they see it. All agreed that in the future energy price will be more dependent on the time of use of electricity over the volume of energy used. Profound changes will affect the industry, for example solar panels with a battery pack can reduce a household’s demand for electricity from the grid by 80%. How do you, as an energy company, recover 80% of the revenue in your key segment? It is crucial to understand that this dynamic is not a choice, but a reality enabled by technological developments. Engie is an example of the business which walks the walk and made a decision to sell USD 50 billion in assets, which now are being reinvested. The business will invest USD 1.5 billion in the digitalization activities alone.
The CEOs agreed that smart infrastructure will play the key role in the energy world of the future and therefore, huge investments are needed in this space. A big open question which remains is: what is the future of big oil? Can those companies threaten independent power producers by venturing into power generation? The CEOs present could envision competition in the future between the two groups of players, but believed that relationship with consumer will be the most valuable asset in the energy world of the future, which puts big oil companies at the disadvantage. Having that said, sizable investments in storage capacities or off-shore wind are needed and that is where big oil is likely to direct its attention, finance and capabilities of managing huge projects.
Energy storage is something every manager of a power business is thinking about. Cost of baseload power is four times less expensive than cost of peak electricity. Once distributed energy storage is added to the system we have the potential to forward those price arbitrage opportunities to consumers, which has a profound impact on the economy’s investment capabilities, which is exactly what The Center for Industrial Development advocates. At the same time introduction of the distributed energy storage to the grid elevates cyber security to the very top of energy discussion, as impact of a cyber-attack on the grid can be massive if all the batteries are hacked to charge, or discharge electricity at once.
All of the businesses present were highly impacted by big data: from the world of one data reading per year to 17,520 data readings per year to 3,153,600,000 per year (100 readings per second) enabled by smart meters. Businesses present at the FT Digital Energy Summit are aware about those change and ready to embrace them. The energy industry is swiftly transitioning into new, more efficient and equal energy markets. The Center for Industrial Development is here for you to help make sense of and embrace those changes.
Mateusz Ciasnocha is constantly on a mission to “unleash dormant potential.” He specializes in agriculture, energy, and Africa, and is also passionate about innovation and entrepreneurship. Mateusz currently studies at ESCP Europe Business School and the University of Oxford, where he is receiving a Masters in Energy Management and Philosophy Certificate, respectively.