Forum Energie 2016: “The new energy wars”
Gérard Mestrallet and Isabelle Kocher spoke at the 9th Paris Dauphine University’s Energy Forum on November 24, 2016. They talked about the major upheavals in the energy world and the radical transformation of the global energy system. They agree about the challenges of the revolution that is underway and the role that companies have to play.
Gérard Mestrallet’s speech on the major upheavals in the energy world
“For a few years now the energy world has been undergoing a series of major upheavals, which are totally changing its character.”
Certain factors are causing concern, while others are stimulating energy players and filling them with enthusiasm. We are all saying that the game has been permanently changed and that we will not turn the clock back. There is a crisis in the energy markets: commodity prices have collapsed and remain extremely volatile. At the same time, the rules of the market are not adapting to the new parameters and are showing the inadequacies of the current market design. Let’s take Europe, for instance: in spite of general overcapacity, there is still the risk of local black-outs; there is no capacity market; the EU ETS is still waiting to be reformed, with a CO2 price that is still very low.
“A three-way technological, digital and social revolution is taking place for a global transition to a more carbon-free world.”
First of all, there is a technological revolution, brought about in particular by rapid progress in photovoltaics, battery storage, and green mobility – electrical and gas-powered. Prices of renewables are still going down even more, with new price records regularly being beaten. In addition to that there is the digital revolution. Smart solutions have changed the relationship with cities, homes and vehicles, and the Internet of Things is becoming a standard means of energy management.
Lastly, a social and cultural transformation is underway. Consumers are now hoping for greater energy sobriety and would like to have customized low-carbon solutions for managing consumption and sometimes to produce their own green energy.
“Climate conferences have intensified this individual awareness and are increasing pressure on governments and energy players.”
The signing of the Paris agreement by 196 countries and its entry into force at the start of November constitute historical progress; moreover, the Marrakech COP22 has confirmed the reality of the action for limiting global warming to 2°C. The ratification of COP21 by China and the USA in September – two countries that between them represent 50% of the planet’s CO2 emissions – has marked significant progress in collective mobilization. Alongside this mobilization, there is an encouraging sign: energy-related CO2 emissions have remained the same for the second year in a row, despite a 3% growth in the global economy (source: IEA).
“It is up to companies to take their full responsibility in this change, especially in implementing a low-carbon growth model.”
Across all these tensions, which we have set out in broad terms, is the birth of a new energy world. It is up to companies to take their full responsibility in this change, especially in implementing a low-carbon growth model. Besides, it is in their interest of course: we have gone from a world where the climate was seen as a constraint to one where it has become an opportunity.
At COP21, we witnessed a large, structured mobilization of companies within the Business Dialogue framework that Laurent Fabius had asked me to moderate. And this is the framework within which we were able to propose and introduce into the Paris agreement the principal of a carbon pricing sign. Putting a price on CO2 emissions makes technologies with low emissions more attractive and therefore is tipping the balance in favor of renewable energy, energy efficiency, and research into “green” development. So these signs are playing a role in speeding up the energy transition, since they encourage and reward investments in low-carbon technologies that are necessary for changing the business model.
At European level, this must be accompanied by a more ambitious reform of the EU ETS market, and, on a wider scale, by market design, in an environment where low-cost carbon appears to be more competitive than low-carbon alternatives. Also, financial players and investors are increasingly mobilizing to study the ways of speeding up the focusing of capital and investment flows toward the funding of a low-carbon economy.
The first commitments made for phasing out carbon were taken at the 1st Climate Finance Day organized last year by financial players upstream of COP21. In the same way, investors – especially insurance companies, management companies, etc. – are progressively committing to reduce their carbon risk, i.e., to “derisk” their investment portfolios. Moreover, the promotion of green financing is part of the main themes of COP22.
Isabelle Kocher’s speech on the changing energy landscape
«“We have to invent different ways of producing and consuming energy, and constantly develop new energy solutions co-developed with our customers.”
We are experiencing something in the order of an industrial revolution: a profound and irreversible change has been set in motion – its primary root is of course the collective awareness of the urgency to act for the sake of the climate, but also to act so as to meet changing social and cultural aspirations. The change in mentalities has made it necessary to set up a new business model, made possible thanks to technological changes. This new energy world will be totally carbon-free, massively digitalized and considerably decentralized.
Just to take one example, according to certain scenarios up to 2050, 50% of the energy consumed in the world could be produced in a distributed fashion — from your roof, for instance — with an efficient storage and energy management system. Digital technologies have become an integral part of energy technologies and are now present at all levels: to support our customers, combine production and consumption, and manage battery storage.
“Technologies are maturing very fast and huge resources have been released to fund the transition to the new energy world.”
The most spectacular example is solar power: in 10 years, the costs of generating electricity from solar power have been divided ten-fold. The momentum of investments has clearly switched in favor of zero-carbon assets and in 2015, more than 60% of new installed electricity capacity was of renewable origin. A veritable reorientation is taking place! Advances in storage technologies are helping to increase the deployment of renewables and their integration within electricity grids. Moreover, we are convinced that natural gas, when combined with renewables, will occupy an important place in the new energy world; and it will gradually become greener.
On the long term, the geopolitical balance will be very different from the one we are familiar with today. Every country has its own energy pool and the current problems of access to energy in developing countries – or resource wars – will diminish. To go back to the example of solar power, energy resources are of the order of 20 times global power consumption and they are widely available on the surface of the planet..
“We are therefore experiencing tremendous changes for humanity, which represent a real challenge for industrial companies.”
Firstly, there is strong pressure on traditional players, with radical choices to be made. A testimony to that is E.ON’s transfer of its thermal assets to Uniper, which was listed on the stock market on September 12, 2016, or the stock-market listing of Innogy by RWE on October 7, 2016. Then access to some of our businesses is becoming more affordable thanks to digital technologies, and many new players, such as Google and Amazon, are showing an interest. Lastly, the competition game is being ramped up and becoming more complex. The distinction between energy consumers and producers that has existed up to now is ceasing to be valid. Peer-to-peer energy management platforms are starting to emerge. On the long term, our neighbors will be able to supply our energy needs. Naturally, that will take some time as massive investments in smart grids are required, but we will gradually get there.
“In this competitive energy landscape, which is undergoing a complete overhaul, ENGIE wants to take part in the energy revolution.”
Having taken note of the world’s exponential complexity and the violence of the tensions that are stirring it up, we have chosen to be a pioneer of the new energy world. The ENGIE Group is taking part in this movement via three main business activities: low- or zero-carbon power production, including gas-fired; major energy distribution grids, including gas grids; and integrated solutions for our customers.
In order to transform our Group over the next three years, we have set ourselves three very simple operating rules. The first is to dispose of everything that is not part of the new world, such as our coal-fired power generation activity. We have taken on a 15-billion-euro asset disposal plan over three years – the amount will be reinvested in our growth for building solar farms, local energy management solutions, major natural gas infrastructures, heating networks, and geothermal energy.
Our second course of action is to anticipate and build the second wave of changes. We have decided to invest 1.5 billion euros in technologies – especially digital technologies – over three years.
The third course of action is to adapt our organization to the challenges of the new world. We want to decentralize the organization to get closer to the territories. We have simplified the organization – in a sense we have broken the pyramid – and changed our operating methods. And we are going to continue with that momentum so as always to be more agile, innovative and truly in a position to co-develop our solutions with our customers, on a local scale, while seeking out economies of scale enabled by our size.
“ENGIE is confidently and determinedly engaged in a profound transformation, with a tight deadline so as to take part in the ongoing movements.”
Businesses and industrial companies have a vital role to play in order to bring about the new industrial era and they have carefully measured the steps to take. We must not forget, for instance, that 70% of the investments made to limit climate change come from the private sector. On the other hand, companies need signs and a regulatory framework to enable them to play a full part in the ongoing revolution… It is up to the public authorities to set up the necessary framework for the actions taken by all players – including ENGIE – to bear the stamp of success.