Davos-Klosters, Switzerland, 20 January 2015 – Diminishing financial returns for utilities have put at risk the ability of the electricity sector in OECD markets to raise the estimated $7.6 trillion in investments needed by 2040 to meet energy policy objectives, according to a new report from the World Economic Forum. This investment is needed to simultaneously decarbonize the sector while maintaining energy security.
The Future of Electricity report offers guidance on transforming the electricity sector to a more sustainable, affordable and reliable system, and outlines recommendations for policy-makers, regulators and businesses in developed markets to attract needed investment. It is part of a broader Future of Electricity initiative, which was launched at the World Economic Forum Annual Meeting 2014, and aims to provide countries, companies and societies with a platform for dialogue and learning amid the transition to a lower-carbon electricity system.
“Since 2000, OECD countries have invested more than $3 trillion in new renewables, conventional power plants and distribution structure, but about 20% more investment a year is still required over the next 15 years,” said Roberto Bocca, Head of the Energy Industries at the World Economic Forum. “Collaboration across stakeholders will be critical to achieving this goal and providing the holistic perspective needed to successfully make the low-carbon transition.”
“The electricity sector is at a crossroads. We are entering a period of unprecedented investment to meet our energy policy goals, but decreasing returns and increasing risk are raising questions over future investment,” added Julian Critchlow, a partner at Bain & Company, which collaborated with the Forum on the report. “OECD countries will need to take immediate action to ensure continued investment across the energy value chain.”
According to the report, root causes of the sector’s investment challenges include:
- Suboptimal geographic deployment: Europe could have saved up to $140 billion if deployment of renewables had been optimized within and across borders; for instance, by building more solar in southern Europe where there is more sun, and more wind farms in the north where wind factors are higher.
- Lack of buy-in: Society recognizes the need for an electricity system that produces less carbon, but has not yet fully bought into the value it brings and other positive impacts like job creation and security of supply.
- Inadequate carbon price signalling: In the EU, the Emission Trading Scheme permits have fallen to a price that will not materially impact investment consistent with a decarbonization programme.
- Declining returns of conventional generation: Falling demand, significant overcapacity, reduced load factors and wholesale price declines have all contributed to a massive loss of value in generation assets.
- Business model disruption: The traditional utility business model is being disrupted by technological innovation and customer trends at the end of the value chain, creating opportunities for new entrants and incumbent utilities.
“There are many lessons to be learned. Stakeholders across the energy sector need to collaborate to foster more cross-border cooperation while ensuring stable regulation,” said Ignacio Galán, Chairman and Chief Executive Officer of Iberdrola, and current chairman of the Forum’s Energy Utilities community. “Central to this effort is a commitment to decarbonizing economies and a meaningful agreement at the Paris climate change talks this year.”
The report also provides recommendations for key stakeholders for attracting investments to build the future electricity sector:
- Policy-makers need to plot the most efficient pathways to policy objectives by incentivizing “no regrets” investments and exploiting the most efficient renewable resources within and across borders. This will require building in flexibility, increasing societal support and prohibiting retroactive policy changes.
- Regulators need to ensure that markets provide clear and effective signals, by rewarding the reliability and flexibility of the system (encouraging supply and demand solutions) or by recognizing the value of reliable back-up grid capacity through network tariffs. Regulators also need to create “level playing fields”, harmonizing incentives and removing unnecessary regulatory barriers to competition.
- Business will have to develop complementary customer-centric business models, creating value for stakeholders by exploiting customer data generated from smart grids and connected devices. Equally, investors need to engage with policy-makers and regulators on how to best balance risk and return, while innovating investment structures to finance the evolving risk profile of the electricity value chain.
“Energy builds and supports modern economies, and is fundamental to our daily lives,” said Steve Bolze, President and Chief Executive Officer of GE Power & Water and Chairman of the Forum’s Energy Technology community. “We have an obligation to future generations to address the current limitations impacting the electricity sector, and provide a sound foundation for future economic progress and quality of life improvements.”
The Co-Chairs of the Annual Meeting 2015 are: Hari S. Bhartia, Co-Chairman and Founder, Jubilant Bhartia Group, India; Winnie Byanyima, Executive Director, Oxfam International, United Kingdom; Katherine Garrett-Cox, Chief Executive Officer and Chief Investment Officer, Alliance Trust, United Kingdom; Young Global Leader Alumnus; Jim Yong Kim, President, The World Bank, Washington DC; Eric Schmidt, Executive Chairman, Google, USA; and Roberto Egydio Setubal, Chief Executive Officer and Vice-Chairman of the Board of Directors, Itaú Unibanco, Brazil.