A Volatile and Complex World
Good morning everyone. It’s a pleasure to be here to speak with you today.
Like other speakers, I want to talk about the transformation in energy that we are living through. It is happening around us and it is not going to stop.
But political and societal events are conspiring to make the transition more difficult. The question I would like to address is not whether these changes will stop the energy transition but whether they will slow it down.
Globalisation has on average been good for the world, but we must recognise that it has left a lot of people behind. Their voice is now being heard and the rise of populism is posing a series of challenges.
Trust in the institutional framework we have relied upon is being eroded. Important old alliances are being threatened.
Technology will impact the very jobs that populism is trying to protect.
Every previous economic revolution has destroyed one form of occupation and replaced it with another. Automation threatens to be different.
The combination of populism and technology will be very hard to manage. Good leadership in politics and business has never been more important. However, in my view there is a deficit of good leadership to meet the challenge.
My hypothesis is that the energy transition is now so firmly underway, that these trends cannot stop it. But this is a difficult backdrop for the transition. Politics, populism and technology can certainly slow it down if we get the policies wrong.
In the UK we face additional challenges at the present time.
A Brief View From The UK
In the UK populism has posed us one of the most complex of tasks. As a result of the Referendum vote of 2016, the UK is presented with the administrative challenge of leaving the European Union.
Britain’s departure from the EU was in some ways the “canary in the coal mine” - the early warning that there are serious problems in established economies as a result of globalisation and the uneven distribution of wealth.
The British government is largely taking a pragmatic approach. Laying out the prospect of leaving without a deal sets up the right dynamic with the EU, though it has certainly created new issues with my native Scotland.
The EU should want a deal with the UK for four reasons: access to investment and trade on good terms; cooperation on defence, security and intelligence; incorporation of the UK’s approach to competition and free markets; and international relations, in particular the UK’s relationship with the USA.
It will be tough. There is no getting around that fact. There is likely to be a loss of value for the UK in the near term.
The improvements in productivity and competitiveness that will be required to make it up will be a long time in coming, and certainly longer than two years.
I do not get the sense that energy is a near-term priority for the Brexit negotiations. There is already so much mutual benefit and investment, and we have a shared and aligned regulatory framework. Therefore, for a future outside the EU I believe the three energy priorities for the UK are longer term in nature and are: energy security, which is already strong; continuity of policy to ensure continued foreign direct investment in energy; and ensuring that the EU energy markets become as efficient as possible. The UK is increasingly a net importer and the efficiency of the EU market will impact consumer costs in the long-run.
Achieving Concerted Action In Energy
So, in the UK and elsewhere the political backdrop for the continued transformation of the energy system has become more difficult. However, I think the transformation has a momentum of its own and a force that will propel it forwards. The forces of populism and short-term politics are likely to slow aspects of it down, but they won’t stop it.
There are three major trends which continue to drive the transition:
- Firstly, the decentralisation of the energy system, with increasing penetration of renewable sources of generation and more and more technologies which are economic at the point of use
- Second, increased choice for the end-user, and therefore greater power to the customer
- Then third, digitisation, and the associated data and insight which is spawning new competitors, offers and business models
Taken together, these trends are accelerating change. The “demand pull” from market forces is taking over from two decades of “policy push” in pursuit of lower carbon outcomes.
People are buying electric vehicles for reasons of performance, not carbon. Shale gas technology is opening up a more distributed manufacturing model for resource development, and making US coal uncompetitive. The desire for home automation and energy control is changing the energy relationship with customers. Customers are now generating their own supply and managing their own energy requirements. Distributed energy looks set to increase as a share of global power capacity from around 2 per cent today to perhaps 12 per cent by 2030.
This is driven by technology, economics and demand. It is unstoppable.
The upshot of all these changes is that the customer is increasingly powerful.
That is why, at Centrica, we have put “satisfying the changing needs of our customers” at the heart of our strategy. We have a 5 pillar strategic framework for both the residential consumer and the business customer.
For example, home energy management is one of the consumer pillars. We are selling about 10,000 HIVE connected home hubs each week in the UK. At the end of 2016 we had sold over half a million home hubs in the UK and we are launching HIVE in the US this year.
Globally, there are projected to be over 50 billion connected devices by 2020.
As every year goes by, customers want more than just energy supply. They want services with their energy, more insight, more control, more peace of mind, more automation and optimisation.
For example, in the USA behavioural demand response has taken off. Customers use smart meter data, energy usage reports and money back incentives to reduce usage during peak events.
These sort of trends are why I think the energy transition is unstoppable. I believe they are also good news for progressing towards our climate change targets.
Let me turn briefly to climate change.
If we are to limit the global temperature rise to just 2oC, then CO2 emissions need to peak before 2020 and then be halved by 2050. It is encouraging that we have now seen three consecutive years of flat emissions.
However, my view is that even if we get onto a trajectory which only gets us near to the 2 degree C goal, we will have achieved so much.
I am confident that, after COP 21 in Paris, we are now on our way.
Even the UNFCCC process, “the slowest common denominator”, has speeded up. Paris/COP 21 was a turning point.
It resulted in a bottom-up rather than a top-down set of commitments.
And China, the world’s largest emitter of CO2, was finally involved.
China committed to increase the share of non-fossil energy sources and natural gas in its energy mix and to reduce its overall CO2 emissions per unit of GDP by 40 to 45 per cent below 2005 levels by 2020.
Since then, there has been less good news from elsewhere in the world. The new American President has called climate change a “China inspired hoax” intended to damage US industry.
It may be that the US, the world’s second largest emitter, now slows down progress on international climate action. Even so, progress will not stop as China is in a position to pick up the slack, and the international community remains committed.
What Should Be The Focus Of Government?
However, I have said that policy could slow this process down. So, in the matter of the energy transition, what should governments focus on at a time of populism?
As always, it depends on the levels of long-term thinking and bravery in the face of societal demands. My sense is that many will shy away from being quite so bold as they have been in the last 20 years.
That still leaves many things they can do which “go with the grain” of populism and self-interest. I suspect that is what most will be tempted to do, hoping that lower carbon outcomes will be the by-product.
The harder thing will be to keep bravely driving for lower carbon outcomes, at a time of preoccupation with economic growth and employment. I sense many will fall at this hurdle.
Nevertheless, let us study what is likely and what can be achieved.
“Going with the grain” would suggest there are five things governments can do.
Firstly a focus on education and re-skilling of the population, including on energy efficiency, energy control and digital skills.
Second, there should be more investment into transformational mission-directed energy R&D .
Third, we need to promote and encourage technology and innovation in the wider economy.
Next we need investment into infrastructure and notably distributed energy systems, such as Centrica’s £19m project in Cornwall to test a fully automated community energy micro-grid.
And finally, we need a major focus on enhancing productivity and efficiency within the economy. This is the key to competitiveness, and has a by-product of using less energy per unit GDP.
I hope governments will increase the pace on these things but they will not be enough. To really keep the full pace of change in the energy transition, Governments need to be brave and keep driving for lower carbon too.
There are three things that a braver government would do to maintain the acceleration of the energy transition.
The first thing is to maintain consistency in energy and climate policy. So much investment into shifting the energy mix is predicated upon the policies and rules we have developed. However, it is so tempting to walk away from some of the more challenging ones to satisfy short-term needs for lower costs to the economy.
The second thing is to keep driving changes to the energy supply mix, and in particular to shift power generation towards natural gas, renewables, nuclear, and away from unmitigated coal.
The third necessity, which may be the hardest of all, is to keep driving for a meaningful price for carbon across the whole economy.
It is only in this way that we can create the incentives for lower carbon technologies as well as charging higher carbon options for the emissions they produce.
This would include, in the UK, maintaining the carbon price floor and in the EU continuing to tighten the supply of allowances in the EU ETS.
These last points on maintaining energy and climate policy, driving for a shift in the energy mix, and strengthening the price for carbon in the economy will not be easy. Governments will have to make tough and sometimes unpopular decisions. They will have to think longer-term.
That is something that governments can be loathe to do, even though they have a responsibility to serve the longer-term public interest.
So having outlined the issues, let me end by offering a few tentative suggestions for where I think policy might be taking us.
I would expect the US to shift its focus from the climate to jobs, technology and education. However, natural gas will keep taking share from coal.
In the UK there will be questions posed about the carbon budget and the level of the unilateral Carbon Price Floor will probably be challenged.
The EU will maintain the ETS but will continue to struggle to improve the price signal.
Meanwhile, China will become ever more serious about climate and tackling coal. There is, I should add, no great immediate need in China to worry about populism.
So, although the West may slow decarbonisation a little, many of the forces of economics and the trends to decentralisation will continue to drive the energy transition forward. China will also be there to take up some of the slack.
It will be a sign of the times if Western governments begin to rely upon China for leadership on an issue on which China has been, until recently, relatively absent.
Climate campaigners and drivers for change should keep campaigning, but they will need to play the long game as their share of voice will diminish for a while.
In summary, the energy transition is well under way. It has already gone past the “tipping point”. It is irreversible and unstoppable, whatever Governments decide to do.
Governments in the West will no doubt for the most part “go with the grain”. However, I hope that one or two will have the courage to maintain some focus on the more difficult aspects and particularly on moving away from coal and maintaining a material price for carbon.
Whatever policy makers do, the future of energy in the economy is now increasingly in the hands of the customer and market forces.
The rise of populism and the challenge to the institutional framework might slow the pace of change of the energy transition for a while, but we are heading in the right direction and the course is set.