May 14, 2018
Getting to the Finish Line of the Global Energy Transition
By Debora Frodl
In short, the energy system is transitioning from one based on large, centralized conventional power plants, to one that includes both conventional power plants and new emerging technologies that are either centrally located or distributed throughout the network, to serve local electricity demand. The new system will be integrated, optimized, and made “smart” by the application of software and the harnessing of data across the components of the system. The integrated energy system of the future will be a tapestry that contains both old and new, physical and digital, and large and small elements.
The world’s power networks have been based on the “central station” model of electricity production and delivery for over a century. Under this structure, set in motion at the 1893 World’s Fair in Chicago, power is produced by large centrally located plants and delivered to customers through a vast one-way transmission system that spans hundreds of miles. In Chicago, George Westinghouse and Nikola Tesla partnered to build and demonstrate a fully operating alternating current (AC) power network, and the resulting “City of Light” in Chicago galvanized public support for electricity and set the industry in motion. Thus, moving away from this centralized structure toward a hybridized system with a mix of central and distributed assets combined with two-way power flows is a foundational transformation—and one that is already underway.
According to the International Energy Agency (IEA), total worldwide energy investment was around $1.7 trillion in 2016. Investments in the electric transmission and distribution (T&D) system, or the grid, and energy efficiency both grew, while investment in oil and gas fell over a quarter from the previous year. Investments in the electric power system topped $700 billion in 2016. While $100 billion of that total was invested in fossil fuel and nuclear power plants, the remaining 80 percent was invested in renewable energy technologies and the grid. Bloomberg New Energy Finance estimates that clean energy investments reached $61.1 billion in the first quarter of 2018 alone.
Of course, this is welcome news. This transformation is a positive development for people and the planet. That’s because safe, efficient, reliable, and affordable power has long been a driver of economic growth and rising living standards. The data is very clear—increases in energy use are positively correlated with gains in education, health, and income. As more sustainable, intelligent, and customizable energy solutions become available, economic opportunities and the quality of life will rise for millions.
However, as with any major change, there will be disruption, creating winners and losers. Some of the traditional suppliers of electricity equipment—such as Siemens and General Electric (GE) —are now reckoning with the global energy transformation and are being forced to drive down costs dramatically in their core power businesses. Declining costs of emerging technologies are putting downward pressure on the market for traditional electricity equipment. These same forces have created opportunities for a host of new players to enter the market with new technologies that are in high demand. They are also spurring innovation in traditional energy technologies, such as GE’s new HA gas turbine which recently set the world record for the most efficient power plant at 62.22 percent.
The irony is that these incumbents have done more to kickstart the energy transformation than anyone else. They have century-long legacies of innovation that helped to create the very technologies that now threaten their core businesses. Many of the emerging technologies that are transforming the energy landscape had their start in the research laboratories of large industrial and energy firms before they spread outward. How incumbent electric equipment suppliers cope with these emerging technologies now that the Pandora’s Box of innovation has been unleashed is another story.
Innovation is the key ingredient that makes the energy transformation accelerate. While myriad forces are shaping the energy transformation, including decarbonization, decentralization, digitization, and the democratization of energy, the underlying engine that enables these factors to transform in the first place is innovation. You cannot digitize energy assets without new information technology (IT) tools at lower costs. You cannot decarbonize the power system without economically-competitive low-carbon technologies. You cannot decentralize electricity networks unless there are viable new solutions available for installation at the system edge like distributed solar photovoltaic (PV) technologies and energy storage systems.
However, while innovation may be the single most key factor, there is no single best way to drive innovation. Innovation needs to come from all quarters, from incumbent energy companies that understand the technologies and how the pieces fit together to start-ups that are innovating around emerging technologies and business models. Governments around the globe should continue to spearhead public research and development efforts focused on clean energy technologies. Tomorrow’s energy innovations are just as likely to come from large multi-national corporations as they are from lone software developers writing a game-changing piece of code. And technology breakthroughs in other industries transportation, aviation, and IT are absolutely part of the energy innovation equation.
Innovation moves faster when we coordinate, collaborate, and form partnerships. We do our best work together. For example, in 2016, Vestas Wind Systems and Mitsubishi Heavy Industries (MHI) formed a partnership to co-develop offshore wind as an economically viable and sustainable energy resource. The joint venture, MHI Vestas, recently won a silver medal at the prestigious Edison Awards for its new 9.5 megawatt (MW) offshore wind turbine. Likewise, Siemens recently invested in IT startup LO3 Energy to bring digital transaction automation to distributed energy technologies. The goal of the collaboration is to jointly develop microgrids that enable local energy trading based on blockchain technology, ideally reducing costs and frictions for customers seeking to maximize the value of their rooftop solar, battery packs, or other distributed resources.
The key takeaway is that despite the intuitive attraction of the narrative that disruptive technologies are born in basements, they are just as likely to emerge from well-known industrial incumbents. Moreover, the new energy solutions that are birthed by such companies can benefit from their existing customer base, deep balance sheet, and market insights. If we follow their lead in the twenty-first century and continue to collaboratively innovate, together we can transform the global energy system into an integrated energy network that delivers sustainable, reliable, and low-cost power to everyone around the world.
Deb Frodl was formerly the global executive director of Ecomagination for GE. You can follow her on Twitter @dfrodl