10 Apr Digitalisation of Energy: A European View
How do European think tanks view the digitalisation of energy? I participated in a workshop organized by one such organisation last week on the likely impacts and timing of digital on the energy sector.
The IEA (the International Energy Agency) is one of the world’s premier energy scenario think tanks. Ask any oil and gas strategist to identify the best sources of high quality data and analysis on the energy world, and the IEA is surely mentioned, alongside the EIA (the Energy Information Administration, a US government outfit), and BP (a large-ish petroleum company with an outstanding economics group). The IEA has oodles of credibility.
The IEA was put in place in 1974 at the time of the OPEC oil crisis. At that moment, governments discovered that they didn’t have enough information about oil movements (production, inventories, movements, pricing) to be able to set competent policies to cope with the shortages in the system.
Today, the IEA has 29 member countries and 80+ associate countries who provide supply and demand information to the agency, participate in research projects and contribute capabilities. Its remit is now much broader, taking in demand management, electricity markets, cross border connectivity, oil and gas, coal, clean energy, carbon, batteries, energy efficiency, and now digital.
The IEA counts many governments among its customers, and is therefore very influential in the realm of policy making at national and local levels.
Why digitalisation? Why now?
The IEA has published research and developed scenarios on the topic of digital in the past, so it is no surprise that its research continues on the impacts of digital developments on energy in the years ahead. Still, the impacts are not well defined, not well measured and not well resolved, to quote a speaker at the World Economic Forum. But at the workshop, the first of its kind, the repeated mention of just a few trigger events underscored the agency’s motivation to reflect with renewed enthusiasm (or concern) on the role of digital in the future.
The first was the rise of Uber, the upstart on-demand personal transport service, and its band of brothers like Lyft. Uber illustrates with stark clarity the speed by which ancient business models such as carriage for hire (dating back to 1605) can be dramatically overturned by bringing readily available digital technologies (smart phones, cloud computing, wireless networks, card payment, social trust systems) to tired business models.
Striking taxi drivers, street violence against Uberistas, challenges to Uber hiring practices and Uber’s tortured avoidance of regulatory entanglements have forced policy makers to intervene with bans or new regulations in what was a stable if poor quality market service (taxis in big cities).
In the same way that the oil price shocks of the 70’s startled governments, the rise of digital disruptions in the energy sector could wreak similar havoc in local energy markets, much as Uber has junked taxis, airBnB has occupied hotels, or Amazon has rung up retail. The question was how many Uber-like developments are out there.
The second has been the alarming rise in the number of cyber attacks on energy infrastructure by dark forces (or perhaps “state actors”, a freshly laundered term for people with sinister intent), with particular reference to Ukraine. In December 2015, those dark forces penetrated the power grid in Ukraine, shut down power substations and cut off power to a quarter million residents in the middle of winter.
North Americans (me, anyway) generally have limited practical experience with the direct consequences of cyber attacks on public infrastructure. Sure, I get the occasional request from my friends warning about their mishaps with viruses. But vulnerabilities in energy infrastructure have certainly scared the bejesus out of the European power industry. And without planning, digital advancements threaten to open up whole new digital war fronts.
Third has been the worryingly slow progress on dealing with carbon, and the hopeful possibility that digital developments might actually help accelerate compliance with the Paris Accord’s 2 degree scenario. For example, digital inventions like OpenEE are helping to unlock creative low carbon solutions in some advanced markets, notably the US. Without some positive guidance, however, policy makers could be lured into blocking the promising answers, promoting poor choices, or generally slowing down the transition to newer energy models enabled by digital.
The workshop approach
I can’t reveal who exactly was there, but the invites included the name-dropper’s ultimate list of the global energy world, including the really big utilities, large oil and gas producers, leading technology companies, preeminent regulators, thoughtful governments, impressive defense agencies, some disruptive newcomers, and me (flatteringly referred to as “oil and gas thinker”).
The IEA structured its workshop as a set of panel discussions, with typically 4 panelists who had only 5 minutes each for their remarks, followed by a large group facilitated discussion. And by “large group”, think 80+ people.
The key questions
The workshop set out to probe a number of perplexing questions, which would eventually lead to an IEA publication for release later this year.
- How big will the impact of digital on energy be, and how quickly will it manifest?
- Which companies are best positioned to survive and thrive in the turmoil?
- What are the most significant barriers that must be overcome?
- What should government energy ministries be aware of, and more importantly, do about digital?
This post will dig into the first question, and I’ll address the balance in a subsequent article.
Short Fuse Big Bang
I quite like this turn of phrase – short fuse, big bang. The fuse refers to how long it will take for the impact of digital to be felt, and “big” is the size of the impact. It’s also the title of a Deloitte publication from Australia that looked at exactly this question on the Australian economy.
Among the digerati, there’s a certain breathlessness and hype about the impact of digital, and the assertion that it’s already here in the form of smart phones, drones, Uber, etc. But the fact is that, of the world’s installed energy production and distribution capacity (power plants, pipes and wires, oil facilities, refineries), the vast majority (80-90%) was built long before digital even became a thing. They are ill-equipped to participate in a digital world without some kind of hard core retrofit which is tricky to pull off since these plants run 24/7.
An apt analogy would be like installing a pacemaker on a marathon runner in the middle of a race, with the runner having to carry the doctors, nurses and equipment at the same time.
The fuse is therefore going to sputter along for years as companies retire plants, build new ones and undertake digital renovations during the occasional turnaround (and only if the economics make short term sense, which they rarely do).
The bang is ultimately going to be big in the aggregate, but will probably be more like a series of small after shocks from an earthquake, minus the big one. We won’t even feel many of them. Only in a few years time, and with hindsight, will analysts be able to identify the key tipping points in the drive to digitalise.
A clear take-away from the session was that energy systems had very significant potential to benefit from increasing digitalization. For example, one presenter shared the following key points just about oil and gas:
- digital would help unlock 450 billion barrels of oil otherwise inaccessible through better seismic interpretation (do the math – that’s $22.5 trillion at today’s prices)
- oil companies use at best only 20% of their data (one of Canada’s leading oil and gas companies put the figure at a measly 0.5%)
- some trials show that data scientists can be as good as geologists at finding oil by applying big data techniques honed in other fields
- autonomous vehicles could improve overall fuel efficiency by 30% or more. That would equate to 2-3 years of industry growth at today’s pace.
What about other sectors?
While it wasn’t the principal aim of the workshop to get into how digital might touch other industries, the point was not lost that many sectors of the economy are going to be digitally impacted, those impacts are hard to forecast, the reduction of energy inputs (or carbon emissions) is a key driver for digital change, and that policy makers cannot easily isolate these sectors from each other through policy choices.
Here’s just a few of the industries poised for transformation by the same forces impacting energy (and the likely impacts on energy consumption):
- Smart logistics – fuel reduced by optimising delivery systems
- Smart manufacturing – fuel reduced by making to order on site through 3D printing
- Smart homes – fuel reduced by changing consumer behaviour with data
- Smart education – fuel reduced by not attending school in person, but on line
- Smart retail – fuel reduced by not shopping in person, but on line
The workshop participants were uniform in their views: digital is going to be big, it’s going to be everywhere, it’s going take a while to play out, and it’s going to help a carbon constrained world.