Today, do we know what the utilities of the future will look like? Will the traditional asset classes remain separated, how will their demand profiles change, will the existing assets meet the new demands, how will they achieve Net Zero targets and what can be done now to support this transformation journey? Nick Bradford, Global Industry Director, Energy, Utilities and Resources at IFS, considers the challenges faced today and ahead for the industry as we looked beyond the global pandemic.
Paris to COP 26
We saw last year the world gather for COP26 with many of the global utilities present at the event, but what actions have been taken since Paris 2015? In the last six years, the evolution of asset base of the power generators has been substantial across Europe and North America with significant phasing out of coal for renewables or gas to lower the carbon intensity of power generation. This is a historic moment for both Europe and North America in that the more renewable generation was brought online than fossil or nuclear generation capacity. China has added unprecedented levels of renewables each year but are still heavily reliant on coal generation in their power mix. With the demand profiles increasing every year across the globe, there is still considerable effort required over the coming decades to achieve 2050 targets adopted by countries globally.
The development of new technology to support the year-on-year demand increases and to achieve the ultimate goal of Net Zero will require utilities to increase their risk appetites to allow quicker development to commercial operation, as well as a more diverse and distributed asset portfolio.
Source: https://www.enerdata.net/publications/reports-presentations/world-energy-trends.html
Diversification of utilities
We are seeing a number of major European organizations’ re-shape their business models and move away from the traditional vertically integrated utility: by shifting assets, pure supply businesses, customer services or even electric vehicle charge point operators. Also, joining the utility sector, we see oil and gas players becoming power generators, transmission operators, retail suppliers or even electric vehicle charge point operators themselves – with Orsted (once known as Dong Energy) setting a clear example and way ahead of many others in this move making -74% reduction in their carbon intensity since 2015. In the UK, a recent offshore wind tender has seen both Shell and BP win capacity with partners as part of the 25GW capacity approved. This is a clear sign that large organizations are not just focusing on the balance sheet but also how they are perceived by investors and customers alike, with everyone focusing on an organizations’ Environmental Social Governance (ESG) metrics.
Record breaking energy markets
We see energy prices in Europe reach record highs in wholesale markets which are now being felt by consumers, this started back in Q2 of 2021 due to a number of factors ranging from weather to a jump in demand post Covid-19 lockdowns, and China’s increasing demand for Liquified Natural Gas (LNG) and Russia supplying less natural gas to Europe. As noted earlier, the drive to lower the carbon intensity of power generation saw the rise of less readily available thermal assets to mitigate the very calm summer weather across the continent with much lower wind yields than forecasted. This resulted in volatile within day price movements power and the dusting off of thermal assets which had been dormant, as well as large demand loads such as steels works coming off the bars to assist in the management of the electricity system in the UK.
So, how do you become the utility of the future?
The drive for operational excellence as well as the ESG targets both at organizational and global levels, are a juggling act to manage potentially conflicting ambitions both today and tomorrow. In the immediate future, the challenges faced from assets, markets and consumers will influence the ability to achieve Net Zero by 2050. In all organizations at all levels, the application of environmental policies, challenging economics, the push from green investors and the perception of customers are critical to success. Bringing as much knowledge from the field to life will be a key enabler in achieving the vision and strategy, as well as highlighting potential risks to success.
To succeed, utilities must face these key challenges head on and with confidence:
- Existing assets will be pushed harder to meet increasing demands whilst new assets are developed and built
- The diversification of assets owned by utilities will continue to change either due to technological advancements or evolving business models
- An aging workforce will potentially create a knowledge transfer gap in understanding existing and new assets, best practices and leveraging technology to mitigate this risk
Therefore, it’s crucial to have information at everyone’s fingertips to inform decisions, forecast demand, ensure a data informed approach and knowing what you don’t know. Embracing the utilization of technology to inform and support decision making will enable utilities to achieve operational excellence and Net Zero in parallel. A utility of the future will not be software-driven but guided by the information provided from it, with the ability to forecast further ahead with greater confidence and to minimize the risks from a diversified asset portfolio by technology, scale or location.
Read our eBook to explore how IFS Cloud has been helping Energy & Utilities in this transformation journey: The Future of Energy & Utilities: powering a great Moment of Service
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