Ana Domingues

Electrification: a lottery ticket that utilities must claim

Utilities face a fundamental dilemma. Due to unprecedented pressure to support the move to an energy-efficient and low-carbon system, they face the paradox of encouraging consumers to consume less of what they sell and distribute—electricity. Their efforts have been quite successful, and with energy efficiency estimated to account for 40% of the contribution to global cumulative CO2 reductions by 2050, they are expected to continue to be as effective.

In addition, growing interest in local energy systems, the new age consumer’s proclivity to produce his or her own electricity, combined with rapidly falling costs of small-scale batteries—expected to account for 57% of storage worldwide by 2040, according to the International Energy Agency—is leading to widespread self-production, further threatening electricity revenues. The outcome—extremely sluggish electricity demand growth.

Is there a lottery ticket for utilities around the corner ?

The short answer is yes. Large scale electrification offers utilities the opportunity to turn around falling demand and recoup lost revenues. This is grounded in the need for more aggressive measures to reach the Paris Agreement targets, namely to keep the increase in global average temperature to well below 2°C above pre-industrial levels. Industrial and transportation sectors will account for nearly all remaining emissions in the ”2ºC-2050” scenario. But to go “well below,” decarbonization of these sectors is crucial. If achieved through electrification, the consequent growth in electricity demand can secure the profitability and relevance of utilities in the evolving energy market.

Electrifying these sectors is just one way to decarbonize them. However, when you take into account the electrification of transport and heating/cooling, combined with the need to decarbonize electricity, electrification stands out as a promising option.

Electrification of transport and heating/cooling

The benefits of the electrification of vehicles have the potential to be multiplied if EVs are viewed as an integral part of the new energy system. EVs and electrified heating/cooling can potentially offer distribution grid management services for balancing and load shedding. With smart charging coordination and exploiting the EVs’ battery for flexibility, higher volumes of renewables can be integrated and further consumer benefits achieved.

EVs will become part of the solution and not be seen as part of the problem in which they impact demand patterns and increase electricity consumption. For example, charging when renewables are generating and wholesale prices are low will allow the energy system to better adapt to intermittent solar and wind generation. Electrification of heating/cooling systems combined with smart meters, dynamic pricing and storage can make an important contribution to the efficiency of the energy system by allowing for direct demand response mechanisms. The combination of renewables and storage with the electrification of transport and heating/cooling will reinforce the pace of decarbonization of all these sectors.

Challenges of decarbonization

Europe aims to be fully carbon-neutral by 2050 and there is a clear and irrevocable trajectory of the power sector toward this goal. Evidence shows us that since 1990, CO2 emissions per kWh have decreased by over 25% across the European Union. There is also indisputable acceleration in the pace of deployment of renewables generation. Bloomberg’s aggressive year-on-year 2040 forecast revisions for solar and wind capacity, especially in the NEO2017 report, are clear indicators.

Yet, there are many challenges to the electrification of transport and the heating/cooling sector, but they are not related to technology. Eurelectric, the European electricity industry association, lists a host of prerequisites that include the need to strengthen the EU Emissions Trading Scheme; update the primary energy factor (PEF); implement strict vehicle emission testing standards; reinforce charging infrastructure; share policy costs burden across all energy carriers; and redesign the market for a holistic approach to integrate EVs and electrified heating/cooling solutions, amongst others

The will to succeed

The list is long, yet there is strong evidence that transport electrification can succeed if it is backed by the necessary political will to meet the climate change targets. Norway, for example, is a leading adopter of EVs, with an EV market share of more than 17%. This scenario is driven by progressive policies such as exemption from VAT, reduced road charges, access to bus lanes and free parking, and an aggressive infrastructure program.

Like Norway, which plans to phase out petrol and diesel cars by 2035, other countries too have decided to ban internal combustion engines; Germany by 2030, France and the UK by 2040. Volvo has also announced plans to offer only partially or completely battery-powered cars from 2019. It is becoming apparent from these steps that the limiting factors of traditional technologies, such as battery capacity and “range anxiety,” are becoming less of a barrier to the mass-market uptake of EVs.

Electrification can be a lottery ticket for utilities, enabling them to reverse decreasing demand and dwindling revenues. However, this will not happen without a strong commitment and effort from utilities. If they want massive electrification across sectors, they will need to take a proactive role in pursuing this intent, which includes convincing regulators and politicians of the benefits and trialing new technologies and business and operating models.

CGI is supporting utilities with these efforts through the participation in initiatives such as the Clean Mobility Center, a collaboration between business, educational institutions and government that focuses on innovative solutions for all durable forms of transportation. At the 2017 European Utility week from October 3-5 in Amsterdam, CGI utilities and digital transformation experts will be on hand to discuss the Clean Mobility Center and its aim to become the leading center for sustainable mobility in the Netherlands.

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