Traditional to Alternative: the evolving business model

Welcome to the latest series of the DNV Talks Energy podcast, hosted by Mathias Steck, Executive Vice President, DNV – Energy. Each week, we will be joined by the world’s leading energy experts to discuss their insights and opinions on how governments, business leaders and wider society can help accelerate the energy transition.



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Traditional to Alternative: the evolving business model

According to DNV’s Energy Transition Outlook 2019 report, the world needs ten times more solar power to limit global warming by 2030.

In this episode, Gavin Adda, CEO of Distributed Generation at Total, explores the changing role of traditional energy companies, with many now diversifying and looking at renewables to help them reduce their carbon emissions, meet changing consumer demands and address new government policies on climate change.

With solar power playing a major role in this transition, Gavin explains that global corporates such as Google and Apple are recognizing the benefits to clean energy and starting to put pressure on their wider supply chain. This, alongside cheaper prices for energy such as solar, is helping developing markets to transition more quickly than ever before.

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NARRATOR Welcome to the DNV Talks Energy podcast series. Electrification, rise of renewables and new technologies supported by more data and IT systems are transforming the power system. Join us each week as we discuss these changes with guests from around the industry.
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MATHIAS STECK Welcome to a new episode of DNV Talks Energy. My guest today is Gavin Adda, CEO for Distributed Generation at Total. Welcome, Gavin.
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GAVIN ADDA Thank you very much.
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MATHIAS STECK Gavin, we want to talk about the transition of traditional fossil fuel based companies, and the uptake of solar in this episode, but before we do this it would be just great if you could give us a little bit of your background.
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GAVIN ADDA I am running Total’s Solar Distributed Generation for South East Asia. We provide solar systems for commercial and industrial companies, normally on their rooftops, across Philippines, Cambodia, Thailand, Myanmar – actually Japan and India as well. The goal is to install a solar system on their facility and give them a discount against the grid. So, we can normally provide between 10 and maybe 20 or 30% discount. So, they get to cut their carbon footprint at the same time as they are reducing their power costs.

Previously I had come to Singapore about eight years ago and wanted to build that business. I had been working in the US doing utility scale projects and we saw the commercial and industrial distributed generation explosion – companies like Tesla and SolarCity taking off – and I was working for Samsung and we looked at buying a couple of those companies. And as we looked at their business model we realised that that business model would be really well suited to South East Asia. So I thought I'm going to come to South East Asia, I'm going to work for one of these great companies, and do distributed generation for South East Asia.

It turns out, eight years ago there was no one here, and anybody you talked to about doing distributed generation solar said it will never work, it doesn’t make any sense, please go away, and if you could sell us some oil and gas instead that would be great. So, I started a company doing that. I raised money from individual investors, and we became one of the biggest companies in India, and then left that company, started a new one, and sold that company to Total end of 2017. And so Total Solar South East Asia Distributed Generation is that company, but now 100% owned by Total, and seeing incredible growth with the support of the Total Group behind us.
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MATHIAS STECK So, we’ve fortunately seen increasing number of the traditional fossil fuel based companies taking responsibility to contribute to the energy transition, Total is one of them. Could you explain a little bit what the ambitions are, but also what kind of friction that causes? Because at the end of the day you also have to run your underlying oil and gas business profitable still.
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GAVIN ADDA Solar as an industry has gone through a massive change over the last decade or so. We have seen costs collapse, and that has enabled us to expand the market. We in Total Solar DG have to deliver projects that make sense even when compared against the most profitable projects that we have on the oil and gas side. So this is a genuine commercial move from Total. Total has an incredible passion and vision on the renewable energy side. We currently have seven gigawatts of no-carbon power generation, three gigawatts of renewable energy, and the goal is to get to 25 gigawatts by 2025.

So, this is a massive growth plan. We are doing that through a few different strategies. There’s organic, but there’s also inorganic, so we are buying companies, and we’ve spent about over $6 billion in the last few years buying companies like Saft and Greenflex, and then the wider portfolio includes companies like Sunpower, so you have a broad base of different portfolio companies that are currently generating a little bit more than $4 billion a year of revenue. This is a serious part of our business.

The utility scale side is generating about one gigawatt of new projects every year, and then the commercial/industrial distributed generation side, which is what I'm running for South East Asia, is targeting around 500 megawatts this year, has completed previously more than two gigawatts, and is looking to get up to the stage of doing one gigawatt a year. So, this is a really significant part of our business. And yes, there is a sense of responsibility around meeting the IEA baseline two degree scenario, but this is also now a really viable commercial business, and so we are seeing customers making decisions to go for solar that aren’t driven just by sustainability but also by good business sense.
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MATHIAS STECK So you just mentioned that renewables has become a business case now, so we are at a tipping point – the industry was dependent on subsidies and feed-intariffs and all these things, now renewables can deliver better return on investments than traditional oil and gas projects. What do you think has caused that, and how does it go further in the future?
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GAVIN ADDA The first thing has definitely been a collapse in module prices, and we’ve seen projects that cost $2 back in 2009, 2019 that are now sort of 50 cent range or 60 cent range. We have seen a really good reduction in costs. Also I think the finance community had become more comfortable, and has seen enough projects go through, and the performance from those projects, to provide financing that’s competitive. But I think the other side to this – and I look at behind the meter distributed generation, so when my customers look at a project, they’re looking at how much did it cost to generate that power, then transmission, distribution, retail, and eventually it gets to the customer.

So, we’re looking at the landed cost for a commercial business. And that is escalating very rapidly in large parts of South East Asia. So, if we take Indonesia for example, we see grid escalation of more than 7% every year for the last 20 years. So, against that backdrop, customers are saying okay, how can I reduce my exposure to that increasing cost, and how can I stay competitive? And solar is reducing cost at around 5% to 10% per year, so we have hit grid parity, and that is augmented even more by the fact that many of these markets have problems with the grid.

So, if you look at Philippines, Indonesia, Cambodia. you’ve seen blackouts happening. So, actually the grid is not able to provide the power from the plants to the customers, and upgrading the grid takes a really long time, it’s very expensive and difficult to do. So, by co-locating our systems with the demand, not only do we give the customers maybe 10, 20% discount on their cost of power, but we are also helping governments and the grid to improve their viability and sustainability.
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MATHIAS STECK In our DNV Energy Transition Outlook, we point out that the transition needs kind of a frenemy relationship between gas and renewables, so they are not competitors, they kind of work together towards the same target. What is your take on these fuels in the energy mix?
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GAVIN ADDA Absolutely agree, and I think we saw a massive increase in gas in the US as well back in 2010, 2009, that period. Gas is an incredibly important part of renewables, because it’s flexible. With new CCGT – combined cycle gas turbines – you can turn them up and down. The problem with solar and wind is that it’s still intermittent, which means that a cloud comes over – for example, in Singapore – and you could wipe out all of the power for 15, 20 minutes, and you need something else that can step in and provide the power during that period.

Coal cannot do that, nuclear cannot do that, it’s really only gas that can do that. And I think that’s part of the strategy of Total, to focus more on being able to provide this gas power, that flexibility. But I think the next stage in what we look at – and you hear a lot of people talking about – is storage, and how can we take intermittent power, wind and solar, plus storage, and combine that in to give us a little bit of buffer.

We think gas is incredibly important, and you definitely see, as you start to increase the amount of renewables in a particular market, whether it’s coal or gas as the base load, you see a real difference in the ability to take on more renewable power.
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MATHIAS STECK Another statement we make in our report is that we need ten times more solar – where do you see that coming from? From established markets, emerging markets, or scaled-up markets?
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GAVIN ADDA I think there’s a few different angles here. When I first started to develop distributed generation in South East Asia, I was usually the first person to meet the customer and tell them, hey, would you like to do solar, and they would look at me in shock and say it’s too expensive, and I would try to argue. Five, six years later we’re now looking at a very different situation, where many customers are aware of the benefits of renewable energy, and they feel the impetus from consumers to do this in a much more heavy way.

So, good examples would be people like Apple and Google who are doing some very big purchases in the US, and are now starting to do that in other countries, and that is driving MNCs generally to look at this space. We have one customer, a very large American customer, but all of their manufacturing is in South East Asia. And so if they want to be sustainable and green, then they need to be able to implement renewable energy on their manufacturing facilities in South East Asia.

And so they are putting pressure on their supply chain to move towards renewables, but quite frankly, if cost didn’t make sense then the supply chain would never make the move. Solar has now got to the stage where we’re cheaper, we can add cost and benefit on the profit line, but we are also cleaner. And so there’s one part which is big, western companies driving their supply chains in South East Asia and Asia generally to take solar, and that is a good fit for a company like Total where we’re quite comfortable putting 50, 100, maybe $200 million down into a project, where slightly smaller companies would never be able to do that.

So in my start ups no way I could have put more than five, maybe $10 million. So we can do scale. This means that in six months we can have a massive impact on a particular industry. That’s one part, and I think that’s going to drive volume. And we’re seeing – quite frankly – portfolio deals where customers are coming and saying I want to do 50 different facilities in one go. And that might be 50 facilities in one country, that might be 50 facilities in 10 countries, and then you need a company like Total that can deliver the same quality of product – so the type of system that goes onto the roof – in the same way across any country, no matter where you are.

And the other part of this I think is you need to think about what the customers worry about. The savings that we can generate on renewable energy are still relatively minimal, it is not comparable to the business interruption risk that they would have if they installed a bad system. You can have leaks, you can have problems with harmonics in the building. So having somebody that you trust up on your roof, that you know is going to be with you for the whole period of a contract – so we might have a 20 year contract with that customer – is really important.

And Total has been doing energy for 100 years, we have assets that we’ve owned for more than 50 years, and so we’re a natural partner, A, for big projects, and B, for long term relationships. And then because we’re so big we can drive economies of scale, so we can actually push out costs down, and therefore give customers a better, profitable, and more interesting deal.
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MATHIAS STECK So, this development you just described, that large consumers take power purchase agreements for direct off-take. What impact do you think does that have on energy markets and on utilities?
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GAVIN ADDA So, the big question that we have is how does that impact the grid? And there’s a battle that’s going on, and I think has been going on for a while, as to whether distributed generation is positive or negative for the grid, and there’s definitely a portion that say that having a lot of power be produced in a distributed way means that the grid no longer has anybody to send power to, and that can destabilize the grid. And then on the other side there are certain people who are saying in Indonesia and Philippines you are not able to provide enough power for them already, so I think it’s probably better to put some power co-located.

I think we’re going to see over the next few years that it’s going to be very customised, country by country, different solutions. So, gas is definitely a solution that many people are looking at, storage as well, but I see South East Asian utilities realising what happened in Europe in the last couple of decades and making moves to be part of the change rather than trying to stop it. But we are seeing different approaches. For example, I think in Indonesia you’ve just recently seen a change in the way capacity charges are dealt with which means that distributed generation is able to comeonline, and I think that’s a very positive thing for the market.
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MATHIAS STECK You alluded to this a little bit already earlier, but I still want to come back to this – what is driving the change in the industry. Definitely we will see a lot of innovation coming up in the next couple of decades, let’s say – so, is it the large corporates, or is it the start ups who really drive these dynamic changes?
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GAVIN ADDA As I said, when I first came to South East Asia to deliver distributed generation I was pretty passionate about joining a big company and driving a lot of impact that way. There was no one here, so I started a business, and that business I think was successful, and part of its success then brought in the big companies. But the fact is, if you want to have big impact, if you really want to change an industry, you need to have tens or hundreds of millions of dollars to be able to deploy, and only big companies can do that.

What I see in Total is a real commitment and passion to build this renewable energy portfolio, to drive change within the region but also globally, and I think there’s also the ability in Total, because of the portfolio, to be able to provide what customers need now, but also be ready for what customers need in the future. It’s only a big company like Total that can buy companies like Greenflex which provide energy efficiency, launch an energy efficiency fund – the Total Carbon Neutrality Ventures – which is a $400 million fund, and then launch a joint venture in China with Envision, and do all of these things at the same time.

There’s no way that a start up can have that kind of impact. And our view – and I would say that having come from start ups as well – is that there’s a really important role for start ups to play, and we need to help them to grow, and we need to help them to grow independently or to make investments in them to help them to grow, but the Ventures team are really looking for opportunities to take these start ups and this new technology and then push them to an existing distribution platform. And to a large extent, Total Solar Distributed Generation is about building those relationships with commercial and industrial customers, we put solar in to begin with, we add storage, we add energy efficiency, whatever we can, whatever the customers need.
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MATHIAS STECK Gavin, I have one more question for you. What is Total doing to harness the new collective focus on climate emergency to progress the energy transition?
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GAVIN ADDA Total is really committed to being part of the change, and what we see at the moment is that customers are galvanised, and much keener to move towards renewables and to make these changes right now. And we are investing to grow our teams, we are investing into new companies and joint ventures like Envision in China, to enable us to service that customer demand. So we will continue to do that, and I think we’ll look to double our business at least every year.
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MATHIAS STECK Thank you very much for your insights, Gavin, and thank you very much for listening. That was Gavin Adda, CEO for Total’s Distributed Generation business.
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NARRATOR Thank you for listening to this DNV Talks Energy podcast. To hear more podcasts in the series, please visit dnvgl.com/talksenergy.
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