The great disruptor
This article was produced in association with Shell
“Technology can and will disrupt our energy system. It is already doing so. Without technology, energy demand would not be growing at 0.91 per cent per year but probably well above that. Oil and gas prices would probably be higher.
“It’s not a question of whether it will happen, but how big will it happen and how fast it will happen.”
This is the bullish view of Occo Roelofsen, Senior Partner at consultants McKinsey & Company. Speaking at the Shell-convened Powering Progress Together conference in London earlier this summer, Roelofsen accepted that CO2 emissions have continued to grow but without technology, he said, they would probably be 10 per cent higher than they are today.
Last year McKinsey created a model—a “thought experiment”–—in an effort to understand the possible impact of changing energy technologies on future consumption. The scenario assumes higher penetration of electric vehicles, greater efficiency within industry and greater use of renewables in the power industry. All these things are possible, said Roelofsen, but to imagine they might all happen together at this rate is “a bit of a leap”. In other words, it comes with a large health warning.
Roelofsen and his team then broke the figures down by industry. They assumed, for example, that 37 per cent of all new vehicles sold would be electric vehicles, compared to a base case of 25 per cent. Meanwhile, the energy efficiency of trucks and aircraft would improve by 2-2.5 per cent a year, against current 1-1.5 per cent per year improvements.
Renewable power sources–solar and wind–currently account, according to McKinsey, for 4 per cent of global electricity production. Under McKinsey’s base case modelling that figure would rise to 15 per cent by 2035. But apply the disruptive technology scenario and the figure rises again to 35 per cent–10 per cent drawn from solar, 25 per cent from wind.
Comparing this model with McKinsey’s own business-as-usual base case as a point of reference, Roelofsen and his team modelled a series of “disruption” scenarios that scaled smart technologies and energy use “through the lines of current progress”.
“We found that by 2035, the world could use 20 per cent less than in a base case reference scenario, more or less keeping energy demand stable–and with a few billion more people in the world and hundreds of millions more cars,” Roelofsen noted. “CO2 emissions in such a scenario would be 30 per cent lower than in reference case, and even 10-15 per cent lower than today.”
The scenario also includes significant changes in the transport sector. Together it would lead to peak oil demand by around 2025 according to the McKinsey model, said Roelofsen, noting that this would be flat rather than a hard peak. “This is partly because we are starting to use less oil in transport, partly because in the chemical sector we starting to reuse plastics.”
Does Roelofsen trust these figures? After all these are a series of projections based on assumptions about future technology adoption, behaviour and consumption. “A year ago when we made it for the first time, it was an interesting scenario, no more. But the changes over the last 9-12 months [suggest] maybe there are signs that a technology scenario like that could happen.” He remains sceptical, however. The scenario supposes radical adoption and changes in behaviour. It is at the extremes of expectation, an experiment rather than a projection.
What’s notable, however, is that even under McKinsey’s business-as-usual scenario growth in energy demand slows materially. Where global energy demand grew by more than 2 per cent between 2000 and 2015, the average rate between now and 2050 is projected to be around 0.7 per cent a year. The decline is due to a number of factors including slower population and economic growth, and the move away from a production-based economy towards a service-driven economy. But it’s also down to greater efficiency and the adoption of digital technology.
For Jacqueline de Rojas, President of techUK, the advance of energy technology is a subset—and shining example—of wider tech-led progress in which the UK has an opportunity to play an ongoing and pivotal role. TechUK represents the interests of 900 technology companies across the country and refers to this changing technological landscape as the fourth industrial revolution. “It’s driven by incredible advances in cloud technology [allowing access to data from anywhere], big data and big data analytics,” said de Rojas. “In the UK we now have access to an enormous farm of data centres which power up our service industries much like the heavy lifting industries used to power up our factories.”
She said that 13 per cent of the world’s data flows come through the UK. “If we don’t capture the opportunity we will be left behind in global tech and digital industries. And specifically the slower the pace of energy innovation, the less time this country will have to transition to a low carbon economy. And, of course, the more expensive it will be to catch up.”
“Disruptive technologies such as the Internet of Things, Artificial Intelligence (AI) and data analytics together with human behaviour must transform our energy system. On the supply and consumption side there has to be some kind of cultural shift in how consumers take responsibility for consuming energy in an efficient way. In the UK we are not as mindful as some other countries about energy and the lack of resources as we go forward. So there does need to be some kind of governmental initiative to lead here because, whatever the plan, we must remember that culture trumps strategy every time. We all need to take a personal interest here because, simply put, the cavalry aren’t coming in this case.”
The UK’s smart grid, said de Rojas, will aid innovation too. “The smart meter rollout will drive the connected home and we conservatively estimate that the benefits to the UK economy will be £60bn by 2050. So all of that smart use of energy is a very important productivity goal for the country.”
The challenge for politicians, policymakers and businesses is how to encourage the development of new technology to ensure innovation happens at the pace de Rojas believes it must. Large organisations are approaching the challenge in a number of ways. Some acquire innovative start-ups while others spin off innovation units, sometimes known as “skunkworks,” which research and develop products and services which often threaten those that already exist within the parent business. Only by separating innovation from day-to-day business can an industry incumbent hope to reinvent itself or, at least keep itself relevant.
A third approach is to set up an investment arm designed to identify and back promising startups. Shell Technology Ventures does just this, as Managing Director Geert van de Wouw explained. “We look at start-ups in the oil and gas domain, in the new energies domain and the digital domain that address some material challenges that we have in our company, whether it is current challenges or new business opportunities or threats.”
Surprisingly, perhaps, van de Wouw believes that selection is not just about the quality of the technology. “It’s better to invest in a great management team with mediocre technology than a mediocre management unit with great technology,” he said. Once a potential investment candidate has been identified, Shell Technology Ventures undertakes market research to assess the potential size of the investable market and examines the buying behaviours of customers before auditing the patent portfolio and software code.
Compared to more conventional venture capital operations, Shell Technology Ventures pulls out of very few of its investments—just two out of 25 to date. That’s less than 10 per cent. “However, our second fund is still young and only started investing in 2013.”
“The reason why we’re beating VC averages,” explained van de Wouw, “is because we are often a customer of these start-ups so we help them find new markets and funding opportunities inside and outside Shell. We have a lot of funding expertise which we extend to the start-up.”
In fact, Shell Technology Ventures tends to invest alongside other VC firms rather than competing against them. Why? “To keep us honest,” said van de Wouw. “You need patience, you need a lot of capital and you need a launching customer that can help pull these startups through the valley of death.”
How does Shell divorce self-interest from the moral imperative of tackling climate change and addressing the energy transition? “We are not a social investor per se,” van de Wous said. “But, for example, through the establishment of a new venture firm fund in Nigeria that we’ve just set up, we are creating new entrepreneurs and new startups in a country where we have a major presence and where we want to help the government diversify the economy and help the society to electrify their energy system.”
David Hone, Shell Chief Climate Change Advisor, looks at energy technology from a slightly different perspective. Through the lens of climate change—a long-running issue that is going to extend into the next century—it is difficult to overestimate the importance of the role of electricity. And he points out that the present is not always a good indicator of the future when it comes to technical innovation. “Imagine if I’d come along with a scenario in 1969 that said, ‘By 2017 the United States will have no manned space launch capability?’”
Borrowing another comparison from the past, he points out that the emergence of the IBM computer and the Apple Macintosh in the 1980s was supposed to herald the end of mainframe and a permanent move to distributed computing. “And, yet, here we are in 2017 and the mobile phone is about as useful as a brick without a connection [to the cloud]. We’ve gone full circle, right back to what is essentially mainframe computing. And yet today, we’re told that distributed energy generation is where we’re heading.
It may be but let’s think more broadly.”
Part of that broader thinking, says Hone, means not just looking at energy transition in the context of digital technologies but rather a technology that is around 135 years old—the electric grid. In September 1882, the Pearl Street Power Station in Manhattan went into operation for the first time. Built by the Edison Illuminating Company, it served 82 customers and connected 400 bulbs.
“Today electricity is ubiquitous and that’s an enormous advance,” said Hone. “And yet it makes up only 18 per cent of the energy that we use, according to the IEA World Energy Outlook 2015. The energy that we use is the oil that goes into the chemical plants to make plastics; the petrol we put in our car; the fuel that goes into the jet that takes us to Singapore; the natural gas for heating in our home and cooking, and it’s the coal that goes to the smelters to make iron and steel.”
To displace that 82 per cent is a daunting task, says Hone, certainly if electrification continues to grow at its current rate—just two percentage points per decade. “Ten years ago it was 16 per cent, 20 years ago it was 14 per cent and 40 years ago it was
10 per cent. So if you do the maths behind that, it takes 400 years to electrify society.”
“I’m not arguing that point but this has been the trend for a very long time. But somehow that has to change because electricity—and other carriers that look like electricity such as hydrogen—are the key to this transition.”
Will we get to zero net emissions? Hone thinks it’s entirely possible. “Electrification is the new technology that makes the difference. It’s electricity in cars, it’s electricity in industry, it’s the electrification of the heating grid and of homes.
“This is a century-long project. How it plays out and what the technology pathways might look like remains to be seen. But it is a plausible outcome.”
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