The reality is that much of our existing energy infrastructure comes from a different era and is therefore rather old and fragile. And while – with significant investment – the age gap can likely be overcome, the more significant, yet often ignored, issue is that, in most cases, the cost of these assets has already been fully written-down. As a result, the energy price now being paid in many countries tends to have factored out the long-term costs of asset renewal and settled at a point that is way too low to support the type of reinvestment that will be necessary to evolve the system towards low-carbon sources.
Another challenge is timing. Simply put, almost every country and city around the world has suddenly and simultaneously awoken to the climate change imperative. And, as a result, a significant amount of activity in this space has all started to occur at once, which has put a severe strain on both the capacity of developers and the financing markets. This can only lead to two things: first, some people are not going to get what they want when they want it, and secondly, market prices are going to soar as demand outstrips supply.
The move towards low-carbon generation will also necessitate massive changes – likely even wholesale change – to existing energy systems. And while this may seem to be simply a problem of scale, the reality is far more complicated. For decades, governments and utilities have tended to think about changes to the system in terms of marginal growth. But within the next 30 to 40 years, the energy system as a whole will need to be very different if we ever hope to incorporate the wide range of low-carbon sources now being commercialized.
In part, this is because many of the low-carbon sources will require a very different transmission system that cannot only effectively manage feed-ins from multiple generation sources, but also provide excess spare capacity to smooth out the peaks and valleys that come from the more intermittent sources such as wind and solar power.
The next challenge with system transformation is that of building up an adequate supply chain in time to deliver all of the required components. Building gigawatt arrays of wind turbines in the North Sea requires thousands of components – everything from gear boxes and blades through to the ships that are going to take them out there. Renewing the nuclear supply chain will be equally complex, not least because most countries have been out of the nuclear production business for a quarter of a century and – facing understandably high quality standards – governments are likely to struggle for some time to properly reignite the supply chain.
Then there is the system design itself, a competency that few companies around the world seem to have mastered. The reality is that designing an entire energy system is much more complex and intricate than building roads or a housing estate, particularly when the new system must be overlaid on top of an existing system within established cities. Governments, utilities and developers will therefore need to work together to develop this level of planning capability if they hope to achieve the scale of change that is required.
Taken together, it seems clear that we will eventually reach the point where the typical constraints that result from the scale of change that we are undertaking – supply chain constrictions, financing challenges, economic system cost issues and the like – will mean that it is going to be a much bumpier ride than most people realize. The reality is that those constraints cannot possibly be solved instantaneously by market forces alone. Rather, it will take the help and guidance of the utilities, regulators and governments working together to essentially become much smarter commissioners of the system.
Government, in particular, will need to place significant focus on reducing the market risk that accompanies this type of change. Some volatility can and should be expected, especially in price. But volatility in policy must be reduced (or, better yet, removed entirely) to encourage suppliers and utilities to make the types of investment – both in capacity and financing – that will certainly be required for the world’s urban areas to achieve a low-carbon energy future.
By Dr Timothy Stone CBE, KPMG in the UK