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"Future of energy is electric and digital"

Friday, November 2, 2018

Dieter Helm, Professor of Energy Policy at the University of Oxford, observes that the macro trend in energy is for it to become more and more electric, and more and more digital, and often both at the same time.

He shared his ideas at the 2018 European Conference in London meeting of oil and gas standards organisation PIDX on June 5.

For example, the shale gas revolution was driven by advances in 3 technologies - horizontal drilling, seismic data and fracking. Of those, one is digital and another (horizontal drilling) is achieved with the help of digital technologies.

Electric transport and oil

A move to electric transport would mean a drop in demand for oil. As oil demand starts to reduce, it could have a big impact on investment in future oil and gas projects, because investors see that there may not be a demand for oil in the future at all.

Gas can run for much longer, since it is 'pretty good for power generation' and 'pretty good for making petrochemicals,' as we have seen in the US, with the big switch from oil to gas as a feedstock for petrochemicals.

Some people are sceptical about how fast the move to electric vehicles will go, but you can see how much investment is going into the sector, he said. Some people say there are limits to batteries (manufacturing and mineral mining), but there are also 'plenty of alternatives to lithium ion,' for making batteries.

There are always people who say that you can't do aviation or shipping without oil, but there are companies developing solutions there too. One company is converting hydroelectric electricity into hydrogen, which is then pelletized to make a solid fuel for ships.

It does not mean that 100 per cent of oil demand will immediately disappear, but these are the changes which will happen 'at the margin', he said.

Carbon

But, 'If you ask me we are going to make a switch [away from oil] fast enough to address climate change [I would answer] not a chance,' he said. One university study estimated that a lot of oil would be 'stranded' by 2035. Dr Helm thinks this will probably not happen.

Bear in mind that very little has happened so far with reducing carbon emissions, except that Europe has moved some of its manufacturing to Asia, effectively shifting from carbon production to carbon consumption, he said.

Renewables and zero marginal cost

A problem which gas power generation faces, and renewables do not, is that, in an electric grid system where companies try to bid the lowest price to supply electricity, the agreed price is the cost of the last unit of output needed for supply to equal demand.

Renewable energy, unlike gas, does not have any marginal cost to provide a little more electricity, so long as there are surplus renewable capacity already built.

This destroys the economics of gas power stations, because the renewables sector will always be able to provide additional output cheaper than the gas sector can, provided that the turbines have been built. It means that no-one will build gas power stations without a capacity contract offered by the state (the state guaranteeing to buy a certain amount of gas).

To put it another way, investors will be reluctant to fund gas power stations when they don't know what the demand is going to be. 'In this world, there aren't variable costs, just fixed costs,' he said.

The business model for renewables can be 'project development businesses.' Revenues over the lifetime will be very predictable, so they can be securitised, like bonds, at very low finance cost.

The problem of intermittency in supply and demand with renewables could be resolved by various methods, including electricity storage (batteries) and demand side reforms (where electricity customers agree to reduce usage when they are asked to). By 2040, 2050, this 'won't be a worry,' he said.

This can lead to a drop in the size of cabling equipment required for electricity distribution. In the old world, distribution companies might ask for big cables to handle the maximum electricity demand they might ever want. Today they might say, if the demand goes above a certain level, we'll just reduce the demand.

Future tech breakthroughs

Something else to consider is possible renewable technology breakthroughs in the coming decades,
such as ways to harness the infrared and ultraviolet light from sun, not just the visible light (as now).

'Today we have primitive solar panels, we can do much better than that,' he said. We have 'graphene coming down the track, nano technology, alternatives to silicon.' We don't know what the breakthroughs will be but we can see the directions where big research is happening. Some countries may come to regret making such big investments in 'first generation solar panels'.



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