The global energy sector is set to witness “Grand Transitions”

[Tämä kirjoitus on WEC Finlandin hallituksen puheenjohtajan Lauri Virkkusen pitämä puhe Tampereen Energiapäivässä 25.10.2016. This article is an excerpt from a speech by WEC Finland’s Chairman, Mr. Lauri Virkkunen at the Finnish Energy day on 25th of October 2016.]

“One rarely gets a first-hand opportunity to witness history in the making. We had one such opportunity a few weeks ago in Istanbul at the triannual World Energy Congress – the main event of our parent organization, the World Energy Council.

Due to several unforeseen twists of global politics, the setting was far from ideal. Unrest and conflicts in the region, such as the civil war in Syria and the fight against the Islamic State led many to cancel their participation to the event, despite the organizers’ repeated assurances to guarantee safety.

The security measures were indeed very visible. And they were further compounded by the presence of Turkey’s President, Receep Tayyip Erdogan, as well as his Russian counterpart, Vladimir Putin. The presence of such state leaders and the absence of Western leadership was also quite striking, reinforcing the unfortunate image that the world is again living a time of deepening divisions.

However, despite the dark setting, the overall atmosphere in Istanbul was far from what I had expected. The mood in the city was calm – even relaxed. The only sign that talked of the tough times was the absence of tourists.

In spite of the politicized setting, the main focus of the conference was not global politics but the “Grand transitions” that the global energy sector will witness in the coming years and decades.

Global energy demand growth is set to fall

The past 30 years have witnessed an unprecedented growth in global energy demand. On average, global energy demand has risen by 2500 TWh each year since the 1980s. An amount that equals an addition of France’s annual primary energy demand. Every single year. And despite growing fears over climate change and rapid growth of renewables, the share of different energy sources in the global energy mix hasn’t changed at all. Fossil fuels still constitute around 85 % of global energy portfolio.

One of the most striking messages from the congress was that this trend is expected to change over the coming decades. This is partly due to international agreements to mitigate climate change as well as technological breakthroughs in renewable energy technologies – the potential of solar energy got plenty of attention. It was also interesting to note that major oil and gas producers, such as United Arab Emirates and Saudi Arabia, are preparing long term plans to diversify their economies in order to adapt to a world where oil demand is significantly lower than today. For example, Saudi Arabia is planning a partial IPO of its crown jewel – Saudi Aramco, the national oil company. The giant company is estimated to be worth 2000 billion euros.

Instead of speaking of peak oil or resource depletion the World energy council expects a peak demand in per capita energy demand around 2030’s. In other words, the fear has shifted from stranded assets to stranded resources as large chunks of the known fossil resources will have to be left on the ground. I suppose it is no surprise that oil producing countries are fighting so fiercely over shares of production – for the first time, there seems to be a genuine fear among the producers that the world will get serious in its attempts to wean itself off from fossil fuels.

However, at the same time it was good to be reminded of the scale of the challenges ahead. The world will not wean itself from fossil fuels any time soon and it was interesting to see how big a role natural gas played in the talking points of the world’s energy leaders (The Turkish and Russian presidents signed a natural gas pipeline deal during the week and the pipeline is also expected to serve European customers as well). Recent discoveries of gas in the Eastern Mediterranean basin have spurred a lot of interest among the region’s countries. In other words, despite the strong rhetoric about renewables and greenhouse gas mitigation, the importance of fossil fuels shouldn’t be underestimated, no matter what we think about the direction of the world here in Europe.

In terms of energy technologies, I was struck by the absence of carbon capture and storage, or CCS, which for many years has been considered to be essential in the global efforts of mitigating climate change. CCS was mentioned many times but mostly in skeptical tones. The main focus in technology was on renewables, energy storage and digitalization. Rapid growth of renewables is a global reality but the next steps are still uncertain – how to foster market based investments without government subsidies.

A lot of expectations are also put in energy storage technologies that would balance the variability of wind and solar power. Apart from hydro power, the cost of grid scale storage is still considered to be prohibitively high.

The role of digitalization was also high on the agenda. Fully automated demand side management is seen as one way around the challenge of variability of solar and wind energy. But it is likely that private consumers will require the “help” of utilities in order to learn how to consume energy in a “modern way”. This can be seen how many traditional utilities, such as Eon of Germany, have turned into energy service companies and are now searching for new business opportunities from the consumer side.

Nuclear energy was much more divisive issue in terms of its relative importance. Many countries have ruled out its use due to political pressures. At the same time others are betting heavily on nuclear – China is planning to build 150 gigawatts of generating capacity by 2030, almost a third of the current global capacity. Some nuclear technology companies suggested that the world could have 1000 gigawatts of new installed capacity by 2050. While the numbers are ambitious, so are the challenges. As IEA’s Fatih Birol put it in his presentation, the world cannot afford to not use both renewables and nuclear energy if it is going to be serious about reducing reliance on fossil fuels.

There were also a lot of discussions with more regional focus. It was interesting to see how little interest European issues gained outside the continent. This wasn’t much helped by the poor condition of the European Union and its economies.

Most European countries are witnessing major difficulties with their electricity markets. Low emission prices, sluggish demand and subsidized renewables have pushed power prices down to very low levels. Most actors seem to agree on the causes of the problem but disagree about the solutions. In addition, the cost of renewable energy schemes has become major dilemma around the continent. Some countries, such as Spain and Romania, have started taxing renewable energy producers that were subsidized only few years ago. Germany and Italy have limited the level of subsidies that renewable producers. France is planning national carbon floor price to compensate low emission prices.

It is clear that the current system is unsustainable as plants that are critical for the system are being closed down. European energy markets are not witnessing creative destruction – we are witnessing a transfer of wealth that is also risking the stability of the whole electricity system.

Unfortunately for Europe, the EU doesn’t seem to have the political capital to foster EU-wide or even regional responses to problems that will only be worsened if a patchwork of national policies is chosen instead. It would be vital that we understand this sooner rather than later. It remains to be seen how much wiser we will be at the next World Energy Congress.

Overall, the conference offered some unique insights into the state of global energy sector and these discussions will be certainly reflected in the future work of WEC Finland.”

[Lauri Virkkunen on Pohjolan Voima Oy:n toimitusjohtaja ja WEC Finlandin hallituksen puheenjohtaja. Lauri Virkkunen is the CEO of Pohjolan Voima as well as WEC Finland’s Chairman.]