The Future of Energy: Interview with Christoph Frei

[caption id="attachment_17994" align="alignleft" width="300"] World Energy Council Secretary General[/caption]

 

The energy industry is being shaped by a number of risk factors, including moves toward decentralisation and digitalisation, shifting demand and prices, as well as sustainability as a public policy issue. As these risks shift, so do the opportunities. Early this month in Dubai, Dr Christoph Frei, Secretary General of the World Energy Council, spoke about the future of the energy industry during Marsh and Mclennan's Energy Industry Conference.  Marsh and their team at Brink News, caught up with Dr Frei following the conference.

BRINK: Let’s start with a look at sustainability. What types of changes are being seen in the energy industry regarding sustainability?

Christoph Frei: One way we like to think about sustainability scenarios is through the lens of music. The first is to think of change in this regard as ‘Modern Jazz’ as highlighted in our latest World Energy Scenarios report, which sets out three potential pathways for the energy sector to 2060. This is an innovative, market-driven approach to achieve individual access and affordable energy through achieving economic growth. This scenario includes having the best technology to perform, and using market mechanisms to achieve energy access for everyone.

The second scenario can be likened to an unfinished symphony’. Here, the director of the orchestra has a clear vision of the public good and what that should look like. Unfinished Symphony involves a government-driven approach to achieving sustainability through internationally coordinated policy and practices. It also involves long-term planning and unified action around climate change. The technology needed to effect change might be expensive, but society may choose it.

Finally, hard rock music. This is a more fragmented, less cooperative scenario — basically everybody for themselves with very little collaboration.

BRINK: What risks to innovation do you see in the energy sector?

Christoph Frei: There are several key risk areas regarding innovation in the energy industry.

One of the main ones is decarbonisation. If you look back over the past 45 years, we have managed to decarbonise gross domestic product (GDP) by, on average, 1% per annum. If we want to achieve a change of two degrees Celsius, we must accelerate this from 1% to 6% per annum. The challenge of decarbonisation is massive. We have a factor of 2.8 times more CO2 in our resources — coal, oil, gas — than we are allowed to emit.

Another challenge is innovation around electrification, decentralisation and digitalisation. The one thing above everything else that is keeping energy leaders awake at night is the impact of digitalisation on the future of the energy system. New business models and digitalisation will define momentum on a path of innovation which will change the way we produce and use energy in industrialised and developing worlds.

BRINK: What is the industry telling us about its key risk concerns?

Christoph Frei: At the Council, we have an issues map where we look at about 40 risk issues in the energy sector, through interviews with around 300 energy leaders in more than 90 countries. Over the past five years, this has shown us a very dynamic market. The risks that have heightened in importance most dramatically are decentralised systems, digitalisation, electric storage, market design, and renewable energies.

Other issues have been cooling down, for example, carbon capture and storage. People just do not believe it will deliver on its promise. Other issues that are of less concern to the industry currently involve unconventional, or renewable, sources. In solar, for example, prices have been falling. Consider that 18 months ago solar was being sold in Chile for 2.9 cents per MW. I recently spoke to several sources who said that this year they were probably looking at 2 cents per MW. That tells a story of continued crashing of prices.

In the automobile area, we have seen some very bold statements from governments, such as India and Norway, with France and the UK, announcing the end of diesel and even gasoline by 2040. The real question is when does China, which has less legacy supply chain and wants to reduce pollution, become a leader in electric mobility? They certainly have expressed this ambition and that will truly be a tipping point.

BRINK: What advances in technology do you see stepping up to play a bigger role in the energy industry?

 Christoph Frei: A key challenge and opportunity is how to bring the Internet of Things to bear in the industry. For example, how do you leverage connected devices so that they can smart-trade with each other with very low transaction costs? Another application will be to automate billing. And yet another will be in the searchability of origin, be that for renewables or oil and gas. We are not there yet, but it is not going to take long to be fully developed.

BRINK: Why is this so important and where could it lead? What role might blockchain and the Internet of Things play in the energy sector?

 Christoph Frei: Ultimately, it means replacing physical assets by digitisation. Is that possible in energy? We have seen it in other industries, such as taxis for example. What might be the case for energy? We talk a lot about energy storage. This has great potential to accelerate decarbonisation in transport or new platform business models as these have the potential to leverage existing assets in new utilisation areas – think of electric boilers or fridges aggregated to electric storage services.

Your refrigerator; which on its own is currently about 100 watts, but if you can capture a million household’s refrigerators and turn them all off at the same time, then you have a 100-megawatt power asset.

That is a very decent storage asset — and you haven’t paid for it, you have simply digitised an existing one. If blockchain enables things like that and removes intermediaries from some processes, you can see it making a real difference in the energy sector.

There is also a huge opportunity for the industry in reaching rural households and delivering access to solutions that simply are not possible without cheap solar, affordable storage, and digitisation — solutions that are provided via cellphones, for example. Mobile technology with cloud support already enable new financing models, such as micro-leasing schemes in the developing world and greater customer choice and control for all. These are transformative examples brought about by decentralisation and digitisation.

BRINK: What about the wider risk landscape — how does it relate to the energy sector?

Christoph Frei: As we all felt again last year, extreme weather events are, naturally, a huge issue for this industry. Over the past 40 years there has been roughly a quadrupling in the number of extreme weather events. This obviously has a dramatic impact on our thinking about how the industry can become more resilient. Locally empowered solutions could be the key here.

BRINK: What trends are you seeing in energy demand?

 Christoph Frei: For one thing, the per capita energy demand will peak before 2030 — it is basically peaking now. That doesn’t mean that global demand will not go up, but the per capita, average demand is peaking.

At the same time, electricity is the new oil. Electrification is firing demand, which will double by 2060. As for renewables, the phenomenal rise behind solar and wind will continue at an unprecedented rate and create both new opportunities and challenges for energy systems. In Unfinished Symphony and Modern Jazz coal will peak in demand by 2020, with oil peaking by 2040.

A key question is how quickly will storage for electricity be cheaper than the relevant counterpart? Natural gas will peak later, because in areas like China, India, sub-Saharan Africa, and particularly in Asia, demand is expected to grow rapidly. Roughly a quarter of the world’s natural gas consumption is in Asia. At first glance, nuclear looks like a success story because demand is still rising — but it is very concentrated. Two-thirds of the newly installed nuclear between now and 2060 will be in China.

BRINK: So, what does this all mean?

Christoph Frei: What it comes down to is the best energy policies to master the transition have a balance between security, affordability, and sustainability: we call it the Trilemma.

This interview was first published by Brink News on  16 March.