Navigating net zero and the next phase of the energy transition 

MITIE asked me to contribute to their 2023 Net Zero Navigator and speak at a breakfast briefing on net zero on the 22^nd February.  Here are my remarks.

Well here we are at an event looking forward to what may happen in 2023, but we are already more than 10% through the year. It is good to stop and take stock of where we are and where we are going but in the world of energy and infrastructure 12 months is far too short a period. Even with epoch changing events like the invasion of Ukraine, real change happens over much longer periods. And even with events or shocks like that, like the oil shocks of the 1970s or the 2008 global financial crisis, it is only over time that peoples’ thinking changes, organisations change strategy, and ultimately investment decisions are made that shift technologies, infrastructure, and the way we live our lives in a different direction to the one they had been on prior to the change. We can’t really see the effects of those shocks for many years and even decades.

In February 2022, here in the Shard at a MITIE event like this – which was notable as it was the first in person meeting after lockdowns – I made five points which are worth reiterating.

1. Net zero is a transition, one that is now driven by investors as much as anyone
2. It is not easy – it needs clear leadership and even unreasonableness from business leaders.
3. Don’t accept what the vendors are saying – push back and drive new solutions – make them think.
4. Think systems rather than components.
5. Consider multiple benefits of projects and particularly how they link to the strategic aims of the organisation.

I still stand by those five points and we can discuss them.  But when MITIE asked me to think about 2023 and the trends around net zero several other things came to mind and I want to explore them a bit.  I am sure that interaction with this audience will help develop the ideas further.  I won’t cover all eight of the headlines in the pre-event publicity, just one or two of them, but hopefully you won’t hold that against MITIE.

First of all there is no longer any doubt that we are in the middle of a major energy transition towards renewables.  There is still some opposition, particularly from the right-wing nut jobs who think that solar and wind are all about being ‘woke’ and that it will leave us all poorer and living in the cold and the dark. But these people are like the anti-car protestors at the start of the twentieth century who passed laws that said you had to have a man with a red flag walking in front of the car – they will be run over by history and laughed at.  

We may also still be having slightly more sensible arguments about the edges of the energy transition, whether or not we should have nuclear power for example or how long do we need gas as a flexible generation source, but we are all clear that there is a global energy transition going on and it is all about decarbonisation, decentralisation and digitisation.  We may also have periods when the transition appears to go backwards, for example switching on coal generators because of the effects of the terrible war in Ukraine, but the transition is now unstoppable.  

Most of what is written about and spoken about is what I call phase one of the transition and what it seems to me to be happening now is that the emphasis is switching from phase 1 of the transition to phase 2. Energy transition phase 1 is all about energy supply – and mostly power supply – and energy transition phase 2 is all about energy demand.

Phase 1 was all about large-scale centralised power generation.  Here in the UK phase 1 really started in 1990 with the introduction of the Non Fossil Fuel Obligation and the first wind farm at Delabole with its 400 kW wind turbines – we have come a long way in 30 years and we now have 13.7 GW of offshore wind operational and 13.7 GW in construction, with a pipeline of 100 GW – a totally amazing achievement – 100 GW is of course more than the total capacity of the grid, and we have offshore wind turbines of 12 to 15 MW each. When I was working on some of the earliest wind farms in 1990/91 such numbers would have been unimaginable which shows that although change is incremental over a year, it is really significant over 3 to 4 decades.

Things are not entirely over yet but it is clear that achieving scale has brought the cost of renewables, particularly solar and wind, down to the point where in most global markets, most of the time, they are the cheapest way of generating power.  incumbents will continue to fight back but the writing on the wall is clear. There may be resistance but when it comes to economics ‘resistance is futile’.  Of course there will continue to be a role for gas as flexible generation, but even that will come under threat as the cost of storage drops and we perfect other storage technologies other than lithium ion batteries such as liquid air storage and compressed air or hydrogen in salt caverns.

Of course the other big fight in phase 1, which is not yet resolved and is only now getting under way, is all about heat – where things are not so advanced as in power. For domestic heat the incumbent gas industry is still insisting that hydrogen in the gas main and hydrogen boilers are the way to go – this makes no sense at all thermodynamically or economically and is typical incumbent behaviour.  The hydrogen industry is very good at employing lobbyists and PR but as Richard Feynman said: “For a successful technology, reality must take precedence over public relations, for nature cannot be fooled”. The future is electric.

And talking about the future being electric – the future of mobility is also electric. There may be situations and limited windows of time where alternative fuels – but not hydrogen – make sense but even large trucks will be electrified. Aviation of course is different but even there, speaking as former pilot and life-long aviation geek, it has been amazing to see how quickly electric aviation has become a thing. It really was still considered impossible ten years ago.  Of course, for long haul passenger aviation, which is not going to go away, synthetic aviation fuel is the way to go and great strides are happening in that area.

So if energy transition phase 1 is all about supply of energy, energy transition phase 2 is all about demand, that means that it is focused on the users i.e. you and me, whether that is at the scale of a factory, an office building or an individual home. It is all about the technologies, the behaviours and the organisational and financial structures we employ when we procure and utilise energy.  

In 1980 Alvin Toffler, the futurist, coined the word ‘prosumer’ to mean someone who both produces and consumes and to a certain extent it has become a cliché as more and more of us generate our own power through solar PV.  

The second word that encapsulates this phase of the energy transition is ’convergence’. This means the bringing together of multiple technologies to produce energy services. In 2020 we worked with EESL, our Indian partner, to develop the convergence business model for India which involves a package of small scale, 1 to 5 MW solar, battery energy storage systems, EV chargers, LEDs, and induction cooking stoves for agricultural communities in India where they now have grid power but it is intermittent. Given that power prices are heavily subsidised in rural India the economic case is a bit different to here in that the Convergence package can provide 24/7 power at a total service cost less than the subsidies that the distribution companies have to pay.  There is potential for tens of GW of these systems in India and they are now being deployed. 

Why is this example from rural India relevant to our market? Because we have the same trends of cost reduction in solar and batteries and these trends, plus grid constraints and the need to install new infrastructure such as EV chargers, mean that when you do the maths and factor in ancillary services you can supply power at less than grid cost, ensure that it is truly green power, and have long term certainty over power prices – all of which is highly attractive. This convergence model, bringing together local on-site or nearby renewables, batteries and energy efficiency – effectively micro-grids and mini-grids – represents the next big wave of investment.   

So what does energy transition phase 2 really mean?

First of all it is clearly based on self-generation – the most you can do given site constraints. This should be PV as far as possible (and increasingly will be) or it could be gas CHP etc. – remember this is a transition – and it can either be on-site or off-site.  Secondly it is also about building in flexibility so that means being able to modulate load, up as well as down, which either means modulating equipment of various types and/or storage.  Essentially we are moving to the world of Distributed Energy Resources (DERs)and every single piece of energy using equipment, whether it be a motor, a cooling plant, or even a lamp, can become a smart, controllable DER. And every DER can be used to provide energy services to the end user but also back to the grid.

Phase 2 is also about more than just self-generation and changing our energy demand infrastructure.  It is also about changing our mental, organisational and financial structures. To take this approach requires a shift in mindset. The traditional mindset is that energy comes out of the cable or the pipe and what we use is simply a function of the technology and the production of whatever we are making or the use of the building – it is an uncontrollable variable.  This is a very passive mode whereas what you need in today’s world is an active mode. It means taking responsibility in areas that traditionally you didn’t as an energy consumer.  It also requires new capacities and skills within the organisation, or in your suppliers, to design, develop, install and run a set of flexible DERs as part of, or alongside, your basic business process.  Essentially you have to become like an asset backed green energy trader – and to get there you have to have a developer mentality.

Phase 2 of the energy transition is also about achieving much higher levels of energy efficiency.  My blog is called ‘only eleven percent’ because that is the global level of efficiency from primary energy to useful energy services which is a pretty shocking number. There are still massive opportunities to improve energy efficiency through better management of what we have, and investing with energy efficiency in mind. 

Two examples on the former – better management of existing assets. Everybody was going on about the gas crisis because of Ukraine and it turns out that nearly every condensing boiler in the country is set at high flow temperature and therefore not condensing. Simply turning down the flow temperature doesn’t affect comfort and can reduce consumption by 6-8%. Incredible but we let that continue for twenty to thirty years. And an example from schools, where sending out cheap stick on the wall sensors effectively provided a cheap energy management system – lo and behold the data showed the heating was operating all weekend when the school was empty.  Basic stuff but still prevalent.  You have to get the basics right first before you can consider sensible investment.  Then when you do invest there is potential for profitable energy efficiency everywhere. 

Every investment should critically examine this potential but usually it doesn’t.  We all know that every day investments are being made that lock in higher than needed energy use – either through ignorance, indifference or other pressures.  We need to ensure energy efficiency is properly assessed whenever there is any investment that uses or affects energy use. We are working with the Energy Efficiency Financial Institutions Group to help banks and investors operationalise this in what is called the energy efficiency first principle, which is EU policy.

As well as acting more like a hard nosed asset backed energy trader you also have to become more responsible for all the other impacts of your energy use.  One really important subject that is rapidly rising up the agenda is biodiversity. Personally I see loss of biodiversity as being more threatening than climate change. We can probably adapt to higher temperatures, albeit at very high high financial and human cost, but if we don’t have any bees left to pollinate crops we are really in a bad way.  So how does that link to energy transition phase two?  Well let’s say you have the opportunity to build a PV plant, or sign a PPA with one.  That is great. You are making a positive impact on the energy transition and adding to clean energy infrastructure.  Well done.  

But……is it one of those monolithic PV farms that wipes out good land and doesn’t do anything to increase biodiversity i.e. the standard type being offered today? Or is it one that has mixed land use and is designed to positively improve biodiversity?  You get to choose. Do you choose greater biodiversity or do you not care and act like the water companies bosses who put profit above all else and think it is ok to discharge sewage into rivers? Just to make the decision more interesting, soon, if not already, the biodiversity enhancing PV farm will become worth more than a conventional one because financial institutions are recognising the need to invest in biodiversity, and will be increasingly required to do so – and guess what, they can’t find enough projects to invest in.  So if you are building a PV plant, or even signing a PPA, think about the biodiversity.  And what’s more think about the social impact on the community.  By the way, none of this is easy but it is important.

The one big thing that has really changed around net zero in the last few years is the pressure from investors of all sorts to implement changes directed towards addressing climate change. I can’t over state this fundamental shift in the investing world, yes you can sceptical and talk about greenwashing and ESG washing – both of which definitely exist – but the pressure is real. It is driven primarily by regulatory and reporting changes such as TCFD, the EU Taxonomy, SFDR and others, as well as risk assessment.  Every fund and every investor is affected by these changes, irrespective of any human or moral position they may or may not have, and that pressure is coming down on companies. When the money talks stuff happens.

Every board I sit on or advise is having to react and come up with plans and reporting on net zero. At the top end of companies there is the capacity to deal with it but in the middle range – even within listed companies – and even more in SMEs there is a need for help, the kind of help that my company EP Group provide, or MITIE can provide. 

As I said last time I was here – this shift in the financial world gives me optimism as at the end of the day money counts and people tend to do what is needed to get the money. 

When we think about changing our infrastructure toward the prosumer and convergence models and financing them we again need to shift mental models. The kind of distributed energy assets we are talking about are too small for traditional infrastructure investors who think in terms of high hundreds of millions if not billions. But a new kind of investor is emerging who sees the potential of funding these kind of projects, not as a one off but as a portfolio, and hundreds of assets across portfolios could reach the scale needed by institutional investors. Some investors are also looking at funding a new type of developer that can develop across technologies in the convergence model. 

For big energy users, like the ones we have in the room, they have the portfolios and they have some of the expertise, but they don’t necessarily want to fund the capital – and they probably shouldn’t because it is an infrastructure return and they can get better returns in their core business. To address this imbalance we need new types of partnerships in which customers provide the energy demand – possibly coming together – and infrastructure investors provide the capital through new kinds of energy service providers. We see these new models beginning to emerge. 

So to sum up:

• We are now entering phase 2 of the energy transition, a phase in which the focus will be more on localised energy demand than on large scale supply options
• Phase 2 will be about becoming a prosumer and involve convergence of technologies to provide energy services to consumers and the grid
• Phase 2 needs an adjustment in our thinking and taking responsibility for our energy use and supply – and including many other aspects such as biodiversity
• New models of energy services will be funded by infrastructure type investors.

None of this is magically going to happen in 2023 but we clearly see the green shoots of these kinds of developments. As William Gibson said, “the future is here, it is just not evenly distributed yet”. When I play forward ten, twenty or thirty years I think we will see as big a change as we did in energy transition phase 1 from the 1990s to 2023.  

And of course I will be happy to discuss these ideas with you now, or in private afterwards. At EP Group we are committed to helping companies and investors think through the options and developing these kind of projects of the future.