Uncertain Path To The Future Electricity System

Increasing uncertainties and declining returns for utilities threaten the transition to a low carbon electricity system.
Published: Fri 23 Jan 2015

A low carbon electricity system is the long-term goal but the ability of utilities to raise the required investment has come under question. In a new report, The Future of Electricity, the World Economic Forum (WEF) estimates that US$7.6 trillion in investments is needed over the next 25 years to 2040 to meet energy policy objectives, but without policy, regulatory and business interventions, this will not be achieved, it finds.

“Since 2000, OECD countries have invested more than US$3 trillion in new renewables, conventional power plants and distribution structure, but about 20% more investment a year is still required,” comments Roberto Bocca, head of the Energy Industries at the World Economic Forum.

The required investments by 2040 are across the board, and include US$180 billion annually in conventional and renewable, centralized and decentralized capacity and US$100 billion per year in the expansion and modernization of transmission and distribution grids. Smarter technologies will also be required to allow customers a wider range of choices, from a more active management of demand to the greater use of distributed generation sources.

Energy investment challenges

The report attributes the investment dilemma to increased uncertainties and declining returns on investments for utilities. Root causes attributed include:

● Suboptimal geographic deployment of resources: Europe could have saved up to an estimated US$140 billion if the deployment of renewables had been optimized within and across borders, e.g. by building more solar in southern Europe where there is more sun, and more wind farms in the north where wind factors are higher.

● Lack of buy-in: Society recognizes the need for an electricity system that produces less carbon, but has not yet fully bought into the value it brings and other positive impacts like job creation and security of supply.

● Inadequate carbon price signalling: In the EU, the Emission Trading Scheme permits have fallen to a price that will not materially impact investment consistent with a decarbonization programme.

● Declining returns of conventional generation: Falling demand, significant overcapacity, reduced load factors and wholesale price declines have all contributed to a massive loss of value in generation assets.

● Business model disruption: The traditional utility business model is being disrupted by technological innovation and customer trends at the end of the value chain, creating opportunities for new entrants and incumbent utilities.

Attracting energy sector investment

However, with actions across the board, the required investments can be achieved, according to the report.

Policy makers need to plot the most efficient pathways to policy objectives by incentivizing “no regrets” investments and exploiting the most efficient renewable resources within and across borders. This will require building in flexibility, increasing societal support and prohibiting retroactive policy changes.

Regulators need to ensure that markets provide clear and effective signals, by rewarding the reliability and flexibility of the system (encouraging supply and demand solutions) or by recognizing the value of reliable back-up grid capacity through network tariffs. Regulators also need to create “level playing fields”, harmonizing incentives and removing unnecessary regulatory barriers to competition.

Business will have to develop complementary customer-centric business models, creating value for stakeholders by exploiting customer data generated from smart grids and connected devices. Equally, investors need to engage with policy-makers and regulators on how to best balance risk and return, while innovating investment structures to finance the evolving risk profile of the electricity value chain.

“There are many lessons to be learned. Stakeholders across the energy sector need to collaborate to foster more cross-border cooperation while ensuring stable regulation,” says Ignacio Galán, chairman and CEO of Iberdrola, and current chairman of the Forum’s Energy Utilities community. “Central to this effort is a commitment to decarbonizing economies and a meaningful agreement at the Paris climate change talks this year.”

Multi-stakeholder task force recommended

The report also recommends developing a joint, cross-geography, multi-stakeholder task force to increase communication and share lessons and best practices across borders and throughout the industry. This should help address the currently “atomized” nature of supervisory and regulatory decision-making bodies.

Further reading

World Economic Forum: The Future of Electricity