Welcome to our November edition focusing on the energy debate. You can also read about our latest news, what our clients are up to, and our expert view from Rob Davies at the Daily Mail on the challenges facing the energy sector. We also bring you an event report from the London Business School's energy group's recent talk with Dr. Yanos Michopoulos, VP Business Development Central & Eastern Europe at Vestas and an analysis piece on macro and micro trends in the energy market over the medium term.
A Word from our Founder - Jonathan Jordan
Carbon may only be the fourth most abundant element in the universe, but it’s probably going to be the one we talk about the most. In the next 15 years the demand for energy is expected to increase by 30%, but renewable energy sources such as solar, wind, hydro and nuclear are only expected to make up around one fifth of global energy supply. Which means the other 80% will be generated by burning fossils fuels, which remain relatively abundant as new reserves are discovered and the technologies to access them are commercialised. Subsequently, it shouldn’t come as a surprise that global carbon emissions are set to increase by around one per cent each year for the foreseeable future, even though newer gas fired power stations produce far less emissions than coal or oil.
Those countries with access to cheap gas, such as the United States, have actually seen emissions fall since 1995, while countries including the UK and Germany, who still rely heavily on burning coal have seen them increase over the same period. In this edition of The Conversation we explore some of the fundamentals of the energy and environment debate. Arguably it’s the biggest challenge we, and our seven billion neighbours face, and will impact the micro, the macro and everything in between. It’s also one of the few issues where the collective engagement of different stakeholders is consistently high and aligned on the common objectives that energy is affordable, secure and sustainable. Getting there is going to be difficult and significant investments need to be made in reducing consumption and emissions. The questions of who pays, and who will bridge the trust deficit has to be addressed, unless of course we want the answer to be the next generation.
We’ve been delighted to be one of the consultancies to support IKEA and Hanergy’s exciting new roll out of Solar PV products across the retailer’s UK stores, making solar energy an affordable reality for all. Hanergy’s offering undercuts the usual price of an average solar installation by almost £1000 and can allow an average three-bed home to earn over £800 a year.
The nationwide initiative kicked off on September 30th at IKEA’s Southampton store and will be rolled out across the UK within the next 10 months. The move is the latest step in IKEA’s sustainability drive which is notable through its emphasis on helping customers lead a more sustainable life at home. IKEA is also leading industry peers in sustainable retail through a number of initiatives globally.
For example, by 2016 IKEA is committed to stocking only LED bulbs, which use 85% less electricity than incandescent bulbs. By 2015, the company plans to use 100% better cotton in the manufacturing of their products and is working towards responsible forestry, with 35 million hectares of forests certified so far. Unlike any other retailer in the world, IKEA is also aiming for energy independence across its 300 stores by investing in 300,000 solar panels and wind farms globally. With a lot more in the pipeline for 2014, all of us at Sermelo are looking forward to helping IKEA show how sustainability can be a way of life.
The Expert View
Rob Davies, City Reporter at the Daily Mail answers three key questions on the energy debate:
What are the three biggest challenges for the UK energy sector?
The greatest challenge for energy firms is to address the public perception that they are profiteering from high energy bills. The industry either needs to make a coherent and simple argument that explains why bills are going up so much, or admit that it can’t. The same need to educate applies to the fracking debate. Shale gas companies have not been successful in explaining to the general public that fracking is no more damaging to the environment – in fact less so – than other forms of natural resource exploitation. Finally, the sector as a whole must address growing calls from investor for lower spending to fund higher shareholder rewards. Shell addressed that this week, pointing out that investment leads to shareholder returns further down the line.
What are the unexploited communication opportunities?
None of the energy companies use social media very well. For instance nPower staff were gleefully retweeting rivals’ price rises last month. They then announced their own hike in bills. When journalists pointed out that this was somewhat hypocritical, given that they had highlighted rivals’ price rises, they suddenly went silent. That’s an example of how not to do social media. A Twitter/Facebook campaign could work in the sector’s favour, if it were properly managed but corporate communications departments typically put junior members of staff on these Twitter accounts, even though they are becoming increasingly important as a conduit of information to the general public.
Why is there a trust deficit between energy companies and the UK general public?
The trust deficit is partly due to a failure to educate people about how energy markets work. But it is also a legitimate point of view that energy bills should not be rising so quickly when times are tough and companies are still making bumper profits. I don’t think firms in the sector have given a coherent argument on this last point. It simply won’t do to mutter about ‘investment’ and shareholders needing to make a return, without providing simple, concrete examples that people can understand. When energy firms make these arguments, the immediate assumption is ‘They would say that, wouldn’t they’.
Out and About
Event analysis on London Business School's energy club talk by Dr Michopoulos from Vestas
On October 22nd, we had the chance to listen to a very interesting talk by Dr. Yanos Michopoulos, VP Business Development Central & Eastern Europe at Vestas. Dr. Michopoulos’ presentation focused largely on current trends in terms of wind energy, as well as specific challenges the industry is facing. He also shared his impressions from a renewable Financial Times conference he had just attended.
One of the takeaways from his talk was that with wind growing rapidly as an industry and the UK continuing to be one of the three major markets for it (the other two he mentioned are Germany and Spain), managing the grid remains a key challenge – especially in terms of capacity and available infrastructure. Dr. Michopoulos also touched on the growing trend of integrating the value chain across wind manufacturers like Vestas, where they have started focusing not only on manufacturing and installation, but also much more on maintaining existing wind assets.
Another important challenge he highlighted was ensuring that companies like Vestas can successfully follow their customers into unknown markets where issues like managing the grid, capacity, and the regulatory framework can be even harder to resolve.
Dr. Michopoulos ended his speech with an overview of the four essential requirements needed by wind investors:
- Stable regulatory framework – unfortunately non-existent at the moment as many countries are constantly rewriting strategies and approaches when it comes to investing in renewables or in energy as a whole
- Adequate infrastructure (grid) – work in progress for many
- Public awareness – depending on the country where you go, you will get different perceptions of the benefits of wind to the energy mix
- Available finance – still a big question to be solved.
Despite the uncertainty around these four requirements, however, he emphasised that the wind industry is maturing and there are many commercial opportunities to be explored.
A short to mid-term look at global energy
Energy is rather a mixed bag these days. Whilst the sector can never claim to have been simple, it has certainly got a lot more complicated in recent years – especially with the introduction of shale and the fact that renewables are now finally starting to pull their weight. On top of this has been the increasing politicisation of energy. Whilst the impact of geo-political events on the price of energy is nothing new, what has been interesting is how energy is increasingly being used as a political football by non-producing countries. Given all these mixed signals, what does the future hold for the global energy market in the short to medium term?
As energy companies keep telling us, it is becoming increasingly hard to extract traditional resources from new, hard to access fields. Whilst new techniques and technologies are being developed to assist exploration and extraction, the fact remains that traditional drilling will get more and more expensive – with this cost ultimately passed onto the consumer. Despite this, previously popular alternative energy solutions, such as nuclear, are increasingly shunned. In the aftermath of Fukushima, a large number of pressure groups have campaigned effectively across the spectrum to remove nuclear.
In France, where the 75% of power comes from atomic energy, the Green Party (coalition partners of the Socialist majority government) have managed to push President Hollande to commit to closing the Fessenheim nuclear reactor and reducing the share of nuclear in national energy.Last but not least, energy politics seem to be becoming a structural part of short-term political rhetoric. As indicated in the introduction, the UK provides perhaps the best example of this, with Leader of the Opposition Ed Miliband committing to a UK energy price freeze promise in order to counteract the rising costs of energy bills.
The legitimisation of this shift by a knee-jerk response from the Conservatives has kept the issue on top of the agenda – where it will most likely remain in the run up to the next national election in 2015.
It is pretty hard to avoid hearing about Shale at the moment. Fracking has offset declines in production from conventional gas reservoirs, and has led to major increases in reserves.
In the US, estimated reserves of natural gas in 2008 were 35% higher than in 2006 – leading to the country becoming a net exporter of LNG for the first time in its history. Aside from the potential for self-sufficiency in the long term for nations with the new resource, Shale is also an additional, credible form of energy diversification in the short-term. Whilst, with the development of pipelines such as Nordstream combined with new LNG facilities at ports including Milford Haven and Fos-Sur-Mer, Europe is long gone from being held hostage to upstream disputes, shale nonetheless greatly increases energy resilience and adds a further tool to the diversification box.
Apart from purely practical issues, there has also been a real shift of oil majors to actually engage with the harm that their industry can cause – moving the concept of corporate responsibility from something that was simply given lip service to something that is actually real. Whilst by no means unique, Chevron provides an excellent example of an oil major that has undertaken investments in health, education and economic development in Angola and Nigeria, as well as in programs aiming to reduce the HIV/AIDS, malaria and tuberculosis threats in those regions.
This movement is obviously not entirely altruistic: as we are increasingly seeing (in Africa, and countries, such as Nigeria) there is a concerted effort on the part of oil producing nations to ensure that their populations benefit from the exploitation of their natural resources. Oil companies have realised that they need to embrace this trend if their lucrative concessions are to continue.
Given this mixed review, what does the future hold?
Demand will obviously continue to grow as populations expand on a rapid scale – the last decade alone has seen consumption of primary energy grow by 30%. Whilst fracking might help to keep costs down, there is very real pressure on the energy majors to find and develop new fields, but to do so in a way that is both economical, and socially and environmentally responsible.
Of particular interest here are the comforting figures concerning the rising trend of renewable energies, with a key shift in activity from mature to developing economies. For example, investment in renewable power was $244 billion in 2012, which increased investment in renewable tech by 19% or $112 billion - the highest amount ever.
Given how the proxy cold war in Syria between the two energy majors Saudi Arabia and Iran could spill over and turn hot at any time (especially with the latter’s continued ability to block the Straits of Hormuz), the market will continue to see diversification in the areas outlined earlier. Added to this mix, however, will increasingly be “green” energy – as the technology to develop it becomes cheaper and its generative capability moves from socially and economically aspirational to a core part of the everyday mix.
Less predictable are the ramifications of short term political machinations. In the UK, the leader of the Opposition (as a former Secretary of State for Energy) knows that long-term nationally imposed market-based measures are probably unsustainable and debilitating, but despite this he is willing to risk this possibility for short term political gain.
As has been seen with the UK’s aviation debate, the governing Conservatives are similarly not adverse to kicking urgent decisions, critical to UK trade, into the long grass for political purposes. Given this, the UK potentially has a problem. The same is true in mainland Europe where Switzerland is the latest country to jump on the bandwagon of anti-nuclear popular pressure and close an atomic facility. Decommissioning similarly continues apace in Germany, but without any comprehensive long-term answer to what will take its place.
To sum up, the world energy supply seems to be getting more diverse, greener and even potentially cheaper. Once again, the most daunting challenge it faces is from politics and politicians. Where possible, it might be advisable for them to give it a break. The use of energy in electioneering would seem one such area.
For more information on related topics please feel free to read the following: