Megatrends: The Energy Transition Outlook 2018

NARRATOR 1 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.

MATHIAS STECK Welcome to a new series of DNV Talks Energy. This series is all about the Energy Transition. And my first guest is Ditlev Engel, CEO of DNV - Energy. Welcome, Ditlev.

DITLEV ENGEL Thank you.

MATHIAS STECK Ditlev, DNV has, in September, in London, launched the Energy Transition Outlook 2018. And you have just recently also launched the Asia Pacific version of that report, here at the Singapore International Energy Week 2018. Tell us about that report.

DITLEV ENGEL First, let’s start with the global perspective. And as you said in the introduction, we presented here in London a few months ago. That's the second time we have done the Energy Transition Outlook. And, obviously, when you update it the second the time, you're very interested to see whether what you said last year is still more or less the same, or whether a lot of things have changed. And I think so, first, the good news really is that the trends that we saw when we launched it in ’17 are still the same.  And let me just give you a few of the highlights. That means that we see a world that will really move into electricity, taking a much bigger part of the overall energy supply. We’re seeing a world where we will move from about 20/80 to 50/50, fossil and non-fossil. And we are seeing that the world energy demand will peak around 2035. I'm sure we’ll come back and talk about why is that. And we’re also seeing that renewables is going to have a major role in the whole electrification of societies. And those megatrends we said last year, and we are now one year in, and we’re still seeing exactly the same in the world, the panning out. So, hopefully, people who read the report get even more comfortable with that, you listen. You see the first time and then, of course, in 12 months, where we’re going to make the update, we’ll see whether anything significant have changed. But I think that's also an important message.

MATHIAS STECK In this report, you also talk about cost of the transition, which definitely doesn’t come for free. But, also, recently, the Intergovernmental Panel for Climate Change had launched a quite alarming report. And it’s not so much about anymore we afford to transform, we have to transform. We cannot afford to not transform. But can you still elaborate a bit on what it demands?

DITLEV ENGEL It was very discouraging to hear the comments from the IPCC a few weeks ago. I think the most positive part was that we can still get to a 1.5-degree centigrade increase, but we have a window of 12 years. And 12 years is, of course, like tomorrow. In particular in the world of energy, where it takes a long time to change the systems. So, I think that was very important. At the same time, we also heard here at the conference in Singapore, from the International Energy Agency, that they are forecasting that the global emissions in 2018 is going to be higher than in ’17. And they were also kind of hinting too, that we would probably see the same in ’19. Which means that what we want to see, namely that the carbon emissions are going down, is not happening. And that means that the need for a faster transition is more urgent that ever before. That, of course, then leaves the question where you say, what of the costs? And I will not, today, speak about what the cost will be of climate change, but let me look at what the cost will be for the Energy Transition’s participation. Then if you just look at the global numbers, we are seeing a world today where we spend around 5.5% of the total global GDP on energy cost in the whole world. And in our outlook, we see that falling to around 3.3%, and that means, actually, we will spend significantly less of our money on energy. And the reason for that is simply that we, through technology and the cost of technology, keeps getting much more, shall we say, bang for the buck. If we just look very simply into renewables a few years ago, we had one, 2 MW turbines, now we have much bigger turbines. But if you look at the cost per megawatt, per turbine, it’s gone done a lot. So, we keep getting much more for every Dollar that we invest. And that means that investing into the Energy Transition, actually, is not going to consume more of the money we have available in the world for other things. It will actually be less, and that’s a very important message, also, in the Energy Transition Outlook.

MATHIAS STECK One finding of the Energy Transition Outlook is also that there's a substantial expansion of the global transmission and distribution grids required. And if you read that first, it’s a little bit surprising because one benefit of renewables in the past was that we said distributor generation would allow us to generate electricity close to loads. But, nevertheless, there's a good reason for this, and I would like you to expand a bit on this. And ask you what is the driver, this massive growth of length and capacity of power lines, are you foreseeing?

DITLEV ENGEL So, there is no better reason for investing then when there is a demand. And as I just said previously, that the world is really electrifying. And that, obviously, will not happen if you do not have the possibility to transport electricity. So, for instance, now we’re seeing societies. We know, for instance, in Italy that they are rolling out 40 thousand charging stations for electrical vehicles. And that, of course, at the same time, also means you have to make sure that you have the necessary investments into the grid. So, the fact that the world is going much more electric means that the demand for investment into the transmission is going up. So that will be a theme. But then, of course, it’s also important to say that depending on where you are, it will be very different how the investment will be used. There will be parts of the world where we know there are still close to 1 billion people that do not have access to electricity. They will probably have microgrids, local solutions. We will have societies who already have a lot of investment into grids, they need to upgrade those grids. So, the investment that will need to go into this will be quite different depending on where you are on the planet, but also, let's say, where the country is right now, in terms of the way that its energy system is organised. But, for sure, I think the most important issue is that this will be driven by demand because we are seeing electrification of societies, and that's why it has to happen.

MATHIAS STECK You mentioned a few factors already, but the Energy Transition Outlook also shows the rapid uptake of electrification in some key sectors, like manufacturing, building, and transport. And so, we have this massive rise of renewables, solar PV, wind, but, still, the report concludes, although this is all happening, that we exceed the agreed carbon budget by far. And cannot hit the 1.5-degree target. So, what else can we do to make that happen?

DITLEV ENGEL I think, first and foremost, we need to think in the way that everything we can do now, we have to do. And what I mean by that is that we must not put ourselves in the position where we make good the enemy of great. We would like to have everything perfect, and we would like to understand everything. But I think we live in a world where the technology is moving so fast that it is very much about engaging, it’s very much about being part of it instead of sitting and saying: Yes, but I'm a little in doubt, should we do this now? And then you hold back. We need to accelerate the Energy Transition. And the way of doing that is really to engage. And I know a lot of governments are, for instance, saying: Well, it’s very hard to focus where we are moving, so we better wait. But, as I just said before, with the 12 years window, we don't have time just to wait and see what will it look like. When we speak to many of our customers today, they are saying: Well, we’re engaging in it but, quite frankly, we don't know how it will evolve, we just know we have to be a player and we have to engage. And I think that is very important, that people really now understand, well, if you can transform into electrical vehicles, do it. And I don't think anybody will find that driving an electrical vehicle is a significant issue compared to driving a combustion engine. Actually, we are saying, in the forecast, that we will see the cost of manufacturing an EV, will soon be cheaper than a combustion engine. And that's one of the reasons why we see the demand for electrification, mainly because the EVs will be cheaper, so you as a consumer will go down, and you have to make the choice, should I pay 100 for an EV or should I pay 110 or 120 for a combustion engine. I'm sure people will prefer because you will basically have your needs satisfied. And therefore, the fact that the technology is becoming cheaper is going to help that. And this is of course, why we make Energy Transition Outlook when you can see this is happening, then it’s about getting ready to prepare for it. So, I just mentioned Italy is now rolling out 40 thousand charging stations, and some people might have said: Why are you doing that, there are no EVs. But the good reply from Italy would be: Well, they will come. And we are preparing for it. So, I think, also, and I heard here now, we are in Singapore today, that Singapore is also now installing, I think, about 1000 charging stations. So, we are seeing these things happen. And then, that again will reinforce the need for the investment into the transmission.

MATHIAS STECK What you also mention in this report is the importance of collaboration between stakeholders to really realise the ambitions of low-carbon targets. So, in practical terms, what do you think, how can these partnerships between players in the energy industry and global corporations pan out?

DITLEV ENGEL I think it’s very important to say that of decarbonising your footprint is an agenda that is way beyond the energy sector. We see that many companies are engaging energy sectors simply because they want to have a different stance on how they consume energy and how they can engage. We are seeing, for instance, companies like IKEA, Microsoft, others, installing renewable generation themselves. But we also see them participating in a new way. Let me just share, too, I think, a very concrete example of what we’re seeing. The first one was in the Netherlands a few months ago, where we had auctioned for big offshore wind parks. And Vattenfall, from Sweden, won the latest auction, and they did not ask the government for any physical support in order to build it. Basically, meaning that the government is making the facilities available, the land, and they will build it. But they're not going to get any financial support from the government for running the wind turbines for many years. And just a few years ago that would be unthinkable. Now, why is that possible when you are at the same time don't know what the electricity price will be like? Then, when you hear from Vattenfall, they say: Well, there are so many big companies that would like to sign 20 years agreements for green power for their needs as manufacturers in Europe. So, they are now in the position, selling off the electricity they will generate, not necessarily just into the electricity market, but are ready making arrangements with big companies. So, we see big companies take different stances, Vattenfall, here, being a good example. We see, for instance, a company like Microsoft engaging completely differently than they've ever done before, not just in their IT business, but also being a player in the energy business. So, let’s say, the partnership with major companies is something that is really of a completely new, let's say, interaction than ever before. And we can see it every day at DNV, in our advisory business, that the amount of interaction we have with companies that wants to have a standing involvement in the energy sector, is like never before. And I think that's a very important positive development for driving a much faster implementation, because these companies actually do take a very proactive engagement into how energy is being generated.

MATHIAS STECK Right. So, Ditlev, slowly coming to the end of this episode already, but we are recording this at the site of the Singapore International Energy Week, and I have two questions for you. First of all, do you see awareness of the matter of urgency of the Energy Transition? You have talked in panels and different presentations here. And the second one would be what is your major takeaway from Singapore International Energy Week 2018?

DITLEV ENGEL There's a lot actually. So, I think I would take the freedom and give you a few highlights. If I should put on my no hat, it would be that when IEA said that we’re going to overshoot the carbon emission in 2018, I felt that was really, really depressing. And a very important message that we have to take back. If I should put on my yes hat, I would say listening to what people are doing, I find it extremely encouraging. And, for instance, looking at what is happening here in Singapore and the development of solar that is being installed on the water, in the lakes, in the reservoirs. They showed a fantastic example of that and the World Bank confirmed that we were now up to 1 GW of installer solar in this way. I think it’s a very interesting way of how we are using solar to support this. I thought that is very exciting and very encouraging. And then, it’s also a lot of small companies you talk to who are engaging in the Energy Transition somehow, finding new niches of ways to develop business, I think it’s very important. And then, also, I would say listening to the fact that the Asian countries have decided to sign up to a new agreement that they should get more than 20% of the energy mix, here in the region, from renewables. But also, clearly recognising that we have a very important role, not just as DNV, but as businesses, to help them, instead of saying: What are you doing? Because, I think one of the key messages from the Energy Transition Outlook is really: This is not really a technology challenge, the cost has come down so much, we know what to do, we know that we have to decarbonise, we know we have to focus on energy efficiency. We know we have to focus on more renewables. But we also know that we have to help, in terms of putting the right regulation. But, for sure, also, the right financing mechanism in place. I've met with a number of financial investors as well, also here in Singapore, and they are all saying: Well, we’re engaging much, much more in making money available. We would like to, actually, participate, but help us making market systems that make it possible for us to invest. So, I think, again, from a positive note, there's a lot of commitment and willingness to engage. What is most important of all, is that we all find the right way to connect the dots. So, we have all the tools in the toolbox, now we have to put it together in the right way. And this is really what the Energy Transition is all about. And then with one additional caveat, it’s got to go fast.

MATHIAS STECK Right. Thank you very much, Ditlev, for these interesting insights of the Energy Transition Outlook of DNV, but also the Singapore International Energy Week. And to the listeners, the Energy Transition Outlook is available for download at the webpage of DNV. And this was Ditlev Engel, CEO of DNV - Energy.

NARRATOR Thank you for listening to this DNV Talks Energy podcast. To hear more podcasts in the series, please visit dnv.com/talksenergy.