Technology and cost are set to take over from government mandating as the principal drivers of renewable energy investment and capacity expansion, according to two global energy marke experts.
Gerard Reid, founding partner of London-based Alexa Capital, and Jochen Kreusel, head of engineering and technology giant ABB’s Smart Grids Industry Sector Initiative, say while government mandating of higher renewable energy input into national power grids (particularly in Europe) has underpinned the roll-out of renewables worldwide, increasing cost competitiveness and “strategic advances in technology” will play major roles going forward.
Technologies, but more importantly the business models around them, are now developing at greater speed. This is something the new breed of ‘smart miner’ must stay abreast of, both from an operating and market opportunity standpoint. The speed of change is altering competitive playing fields in all types of industries, leaving some – even big corporates – behind.
“We’ve seen very rapid reductions in [variable] costs, especially in solar but also in wind,” Reid said.
“Renewables are rapidly becoming too cheap to ignore.
“In terms of [capital or fixed costs], people might say the costs of solar are US$1 million/megawatt and say the figure for gas is about the same, and so assume they are at parity. But that’s not true because what you really have to look at is the capex per MWh. If a gas generator is going to run 60% of the time and a solar park is going to run 15% of the time, the capex cost per unit generated is going to be four times higher for the solar park.
“If we want to get renewables onto the system, we have to get the cost of capital down. Capital costs are going to be determinant in getting renewables onto the grid. This can have different implications across regions. For example, the cost of capital in India is almost twice as high as in Germany. However, as India has nearly twice as much sun, the cost of electricity production is more or less the same in both countries.
“We’ve never had this scenario with conventional generation because we recovered capex through the power price, and the power price was determined by the marginal cost. So if fuel costs went up, they went up for everybody, and so the power price went up. With renewables, we don’t live in that world anymore. Based on the low marginal costs of renewables, a utility or power producer can offer consumers a power purchase agreement with a set price for the next 20 years. No utility would do this with gas or coal.
“However, with competition in the market, a consumer can switch suppliers quickly, and thus sign only short-term contracts. This does not align to renewables as investors need the security of power prices to recover the capital costs. This requires a fundamental change in the way we look at power markets.”
Reid said Europe’s massive build-out of renewables needed green-movement pressure to change laws around emissions and pollution, and the new regulatory environment was still important because “the power markets as we know them are broken – no generation of any type can be built without some form of very clear regulation in place”.
“In Europe you are not going to get your capital expenditure back, except maybe in the United Kingdom. Without that return, there is going to be no investment in power generation. This is why renewables – and energy in general – will need a support or market mechanism,” he said.
Kreusel said technology, and the cost of the technology, was “where industry is flexing its muscles”.
“After what these companies [Apple and Google] have done to the telecoms space, they are now looking at the automobile and electricity space and seeing it’s also all about data”
“Electricity demand is growing rapidly and CO2 emissions have to be reduced. These two countertrends can really only be addressed by technology – front-end renewable technology per se and the associated technology that supports it. Indepth knowledge of renewable power generation technologies and experience installing these around the world are required to serve the renewable energy industry. This comprehensive approach will become ever more significant as the renewable business continues its rapid evolution.
“ABB sees a large part of the renewable cost equation and the power markets issue being addressed by products that make the integration of large amounts of renewable power into the grid cost-effective and straightforward. I’m thinking here about automation and control systems for flexible power generation, HVDC, FACTS and a whole host of other enabling technologies on one side, and a market design giving flexibility and dispatchability at an adequate price on the other.”
The discussion between Reid and Kruesel, presented in the latest ABB Review journal, offers some fascinating insights into a rapidly transforming global power generation market, and the implications for traditional energy suppliers, and the convergence of power, manufacturing, communications and information technology industry megatrends.
Reid said while wind, wave, biomass and geothermal power were evolutionary renewable technologies, “solar is a revolution”, with the global market growing from 1 gigawatt to 50GW in the past decade.
“You can put it in your calculator, you can put it on your roof, you can build a big plant, and it’s quick to install. We’ve never had a technology like solar where you can do something so locally, cheaply, quickly and effectively,” he said.
“Looking at the cost roadmaps of companies in the future, I see cost reductions of another 40% [for solar] over the next five years. Meanwhile, for wind I only see a cost reduction potential of maybe 5% a year, but not 10%.”
Asked where investment for new renewables capacity was going to come from – and specifically, would traditional incumbents defend their market dominance and take the lead, or would new investors move in and gradually take over the market – Reid and Kreusel said it was useful to look at change in the telecommunications industry.
“We actually still have all the old incumbents … [but] the problem [they] have is that after 100 years of doing the same thing, they may face a challenge in adapting to the sudden revolution,” Reid said.
Kreusel added: “The old [telecoms] are still there, but much of the money in value-added telecommunication-based services is being made by new players. The incumbents are still providers of the commoditised infrastructure, but the money is being made by the users of that infrastructure, or in one prominent case, by a device manufacturer.”
Reid said another analogy he saw was the automobile industry, which was going through big changes as it “electrifies and is thus bringing itself closer to the utilities”.
“One of the main reasons for this is that costs of batteries are going down. Looking at automobile manufacturers, I ask myself, what they will be in 10 years’ time. I think some of them will be service companies. Some might use the automobile as a platform, but will be providing energy services and a whole range of other services into them.
“This is why I think that the players they should be watching out for are the likes of Apple and Google. After what these companies have done to the telecoms space, they are now looking at the automobile and electricity space and seeing it’s also all about data. They can say, ‘we are already in the data space and we are already in the home. Let’s go and run the electric vehicle, install the solar panel and connect them all together’.
“So in the future it’s not just going to be about the power market but the power market will be interconnected with these other spaces in a convergence of two if not three industries.”
Emerging leaders in ‘new industries’ did not just bring disruptive technologies, but “disruptive technologies and business models”, Reid said.
“If we look at the so-called disruptive businesses that are out there, what they really are is a mixture of technology and business model. If your customers have a battery in their car, you can aggregate those batteries and use them to trade in the power market. The idea might sound crazy, but it makes sense from the battery manufacturer’s or automobile maker’s point of view. He wants to make sure that the charging of that battery is controlled. He wants to control the charging by giving you a service package. So he could say, ‘here is a flat rate for your battery, you can plug it in wherever you want and it will cost you, say, $35 per month’. He has all the data about you. He knows where you are. He realises you’re in the airport and are going to be in France for two days. So he takes that battery, aggregates it across a country, and participates in the power market. That is a revolution.
“And manufacturers and consumers will sign up to this agreement because it is in their interest. You are thus going to get customers signing up for long-term purchase agreements. Many of us do not want to go out and buy a $500 smartphone but accept those costs when they are hidden in our mobile phone bills.”
Kreusel said the e-mobility renewable energy chain was an area drawing in more and more new players. Increased flexibility in product offerings would be a major trend.
Reid said: “My view is that everything is going to go electric and everything is going to go digital. The consumers are also beginning to change their behaviour. Young consumers don’t need to own the latest top-of-the-range car. They are quite happy to actually just rent a car. And this means they can rent the best car for the job rather than having a one-size-fits-all car. I’ve heard that some car manufacturers make twice as much money on a car that they put out to car sharing. That’s impressive in terms of margins – but of course it doesn’t help them in terms of volumes as they’re going to make fewer cars overall.
“But it’s very clear that they’re moving from thinking in terms of ownership models to service models. This is a very courageous strategy, but in a revolution you need to be brave. You cannot predict the future but you can try to shape it.”
Kreusel said system-integration technological advances that enabled further deployment of renewables could see a bigger role for battery storage. But extending the telecoms analogy to the power sector – with storage emerging as an alternative to transmission via grid infrastructure in need of new investment – came with limitations.
“I think there is an important difference, namely that the mobile networks have in part replaced the functionality of fixed lines in a one-on-one manner. In the power grid, there is the challenge of providing electricity in regions with strong seasonal variations,” he said.
“For example, winter in the northern hemisphere. Batteries can shift the load within the day, but you cannot shift loads over months in an economical manner using batteries.
“I see only two ways to deal with that. One is to not go beyond, say, 50% renewables. The other is to connect regions with transmission. Areas with the best wind and solar resources are often situated in remote locations. Tapping into these resources will require efficient ways to transport a large amount of power to the consumption centres.
“Power transmission interconnections need to be enhanced to facilitate optimum utilisation of renewables and balancing of loads.”
Source Mining Journal 03/03/16