Power Shifts: Are utilities prepared for the low carbon transition?
31 October 2016
By Volker Beckers and Jonathan Grant
With governments aiming to limit warming to well below two degrees, the low carbon transition will need to be rapid and in all countries. But what might that transition look like? Our Low Carbon Economy Index (LCEI) model calculates the decarbonisation rate needed and with each edition of our report, the challenge gets tougher. When countries fall short of the global goal, they need to do more in subsequent years. Today, the annual decarbonisation rate needed to stay within the two degrees carbon budget is 6.5%, up from 5.1% four years ago (the 2012 report was titled “Too late for two degrees?”). To put those numbers in context, France achieved a 4% average annual reduction in carbon intensity in the 1980s when it switched to nuclear power. The shale gas revolution in the US from 2005-12 resulted in a 3% annual decarbonisation rate.
Academics, companies, agencies and NGOs have all published scenarios that describe how the low carbon transition could occur. You might think that there would be little in common between Shell’s ‘Oceans’ and ‘Mountains’ scenarios, and the ‘Energy Revolution’ that Greenpeace describes. But energy transition scenarios typically have three common themes:
- The first is the decarbonisation of electricity with the rapid growth of renewables, a shift towards gas and the use of carbon capture and storage on fossil fuel generation.
- The second trend is the electrification of the wider energy system, typically transport first (specifically passenger vehicles), and then heat in buildings and some industrial processes.
- The third trend is a heroic improvement in energy efficiency. In many two degrees scenarios energy demand stays roughly flat through to 2050, implying that the energy efficiency improvements keep pace with GDP growth of just over 3% per year. Currently, energy efficiency improves at close to 1% per year and it’s even debatable whether it also reduces emissions.
Smart meters, demand side response and other new energy technologies could play an important role in drawing these three themes together. They offer the possibility of managing or limiting electricity demand growth and linking intermittent renewable generation with the energy storage potential of electric vehicles. But such a transition will clearly be disruptive for some. Many utilities that still think their main purpose is investing in reliable, secure generation haven’t seen that customers have changed their perceptions about what is important to them.
Community energy development and similar initiatives have enabled smaller scale decentral projects to transform the market and shift power away from the classic utilities. The occurrence of these new players who use and generate at the same time for their own needs have tilted the playing field against established players who still need to deal with their legacy of old systems. The utilities have underestimated how quickly customers and communities have adapted to the new challenges. In addition the rapid development of digital technology has accelerated that transformation and added pressure to the big utilities we know.
For more information, please see the 2016 Low Carbon Economy Index or please get in touch with us directly.
Volker Beckers, PwC Advisory Board Member and former CEO of RWE npower
Jonathan Grant, PwC Director, Sustainability and Climate Change