10 December 2019 year Who will build the energy industry of the future

Mikhail Lifshitz 

Chairman of the Board of Directors, ROTEC

When it comes to the future of the industry, I recall my meeting with the Rwandan Energy Minister. He said that one of his ministry’s tasks is to help to preserve the unique natural environment, to take into account its specific features and adapt to them. And he asked me at one point: “You love Africa, and you’ve traveled around it, haven’t you? Did you see the birds? Why do they jump from branch to branch?” It got me thinking. “The fact is that one bird can’t fly more than three meters, and the other – no more than five. And when you build a highway or power line (70-100 meters wide) across the continent, it’s such a dissection of the ecosystem for them that these birds will never see each other again.”

Conserving resources, distributed systems, rejecting unification – these are the trends that will change the energy industry forever, whether we’re talking about Africa or Russia. However, this still isn’t obvious to the fans of the traditional model of big energy.

The energy industry has been moving along the model of consolidation for a long time. But now, our ideas about the future of the power-engineer profession and the industry as a whole are beginning to change.

Not everyone will be brought along into the future

The lack of education and, as a consequence, the executive’s short-sighted view is a problem not only for the energy industry, but also for politics (Italian ministers even boast about their lack of diplomas) and business in general. Nearly 40 airlines have gone bankrupt in Europe over the last two years. The reason is an ill-conceived business model where by the companies “take off” on loans while maintaining dumping prices for tickets.

But the math is simple: equipment depreciation, fuel costs. Company management ignores this, sets the price within a conditional 3040 dollars per ticket and talks about how “they’re going to succeed.” Insofar as the business is socially useful, the state strongly supports it and doles out loans. And when the scheme finally falls apart a few years later, the task of such “businessmen” is to run as far away as they can get.

Similar things happen in the energy industry, especially the alternative one. If solar-park builders promise to create something that works at 4 cents per kilowatt-hour, then their business model is called “Five years to bankruptcy with maximum capitalization at year three.”

Seemingly-obvious trends go unnoticed for a long time because of such distortions. About six years ago, I participated in an Alstom strategy session. The CEOs of customers were invited to the strategy session, including representatives of E.ON, Shell, and similar companies. A five-star hotel in Paris, a big conference hall, lots of people, presentations. To keep the audience’s attention, the organizers arranged something like a “Predict the Future of the Energy Industry” game. Two scenarios were proposed: development towards consolidation or a new path forward, i.e., towards distribution.

And what do you know, the so-called “Big and Beautiful” concept consolidation won the vote. I then spoke out against this scenario, as I believed that it would be impossible to continue to adhere to a single global model of generation – to unify the world. The drive towards endless consolidation is one of the main problems facing energy giants: the “Big and Beautiful” concept, for which there has been no alternative in the world of “analog” centralized energy, creates the preconditions for cases like Enron in the age of decentralization. This movement is truly tectonic, and it is impossible to stop the disaggregation and decentralization of the global energy industry.

It is not possible to unify the world

Each geography has its own understanding of how to live, and at what cost energy should be provided. Alternative energy could be a solution in some cases, and traditional generation in others, but there won’t be a single template for everybody, that’s for sure.

When we talk about distributed generation, one picture comes to mind: solar panels on roofs. But, even among distributed systems, there is no one-size-fits-all solution – something that would be appropriate in one ecosystem would be completely unacceptable in another. When we pave over a patch of fertile land in a mountain valley to erect a solar park, it’s the same environmental blow as if we put a coal boiler there.

Each region needs to find its own sources of energy. Take, for example, the Island of Rhodes in Greece. It's always windy there, attracting surfers from all over Europe. So, how should Rhodes get its energy? The island is too small for solar parks. The conclusion is obvious – by installing wind turbines.

Or take, for example, Bhutan – the only country with a Ministry of Happiness, where clean electricity is the main export. It isn’t generated using solar panels – local power engineers have made a bet on damless hydroelectric power plants: at formation, only part of the waterfall water is diverted; the riverbeds are not blocked, and the fish are able to swim their usual routes. This is a rather refined story of distributed renewable energy.

Russia’s Kamchatka Region also has its own unique ecosystem, which itself determines the peninsula’s means of energy generation. It’s located between the sea on one side and the ocean on the other, so its weather is usually cloudy, making solar panels, once again, unfeasible. Nor is the Big and Beautiful format suitable there: the region’s entire population amounts to just over 300 thousand people. All of which leads to the question: how can energy be generated there?

The answer is provided by the locale itself – the peninsula is rich in geothermal sources. And you don’t need any fundamentally-new, breakthrough solutions to harness them in the production of electricity – you can use the familiar Organic Rankine Cycle (ORC). In this case, the heating medium for the ORC installation is the hot water derived from geothermal deposits, and this is also an example of renewable energy.

If we want to preserve the region’s ecology, it’s important to evaluate energy-generation options not from the standpoint of which energy suppliers are represented there and which are considered “traditional”, but rather from the standpoint of the consumers living there, in other words – universal systems suitable for any area simply do not exist.

What’s good for a German is (so far) expensive for a Russian

Unification is not only impossible simply because of geographical and climatic differences, but also because each region also has its own economy, its own unique social characteristics. In Europe, especially in Germany and Scandinavia, there is already a whole class of people who think about the “environmental component”: how much they consume and what impact they have on the environment. These are usually affluent people, for whom deliberate consumption (including energy) is not a question of social responsibility, but of personal comfort.

Heating systems featuring the use of heat pumps represent one of the options for pinpoint generation, which is built “to suit the consumer” – to suit the region’s geographical and social landscape. The system works like this: a well is drilled near the building – even in winter, the temperature at a depth of 50 meters will reach plus 1520 °C. If you pass water through this well, it will gather the underground heat. Provided that the building’s battery temperature is maintained at 40°C min., the building’s boiler only has to heat the water starting at 20°C, as opposed to 0°C. Consequently, just half the energy is spent on heating.

But, it’s a costly endeavor: you have to drill a well and equip it with a heat exchange. The payback period of the heat pump is 49 years, at a service life of up to 20 years. This is a long-term investment, and it’s obvious that it would be much more relevant in Germany than in Russia – just look at the difference in kWh cost. The high cost of generation makes small energy more relevant where, due to emerging technologies, users can afford to save “in the long run” on the difference between energy production and utilization.

We haven’t yet fully matured the issue of energy savings in the private sector – electricity is still relatively cheap for the consumer. But for domestic industry, the energy-savings topic is extremely relevant. But even here, the solutions can be very different from those used in the Western world. At our plant, we achieved a four-fold reduction in energy consumption: we switched to radiant heating, energy-saving lighting. But the main thing is that we just “closed the holes” – we built thermal vestibules, ensured the absence of drafts. As a result, we saved money, and also provided workers with completely-different working conditions.

Climate, economy, cultural code – in each region, they determine a unique path towards energy development. To talk in such circumstances about unification, much less about the whole world’s transition to the Big and Beautiful model, is at the very least naive. Yet, the rejection of unification is not the only thing changing in today’s energy sector.

We’re all going to become power engineers

Let’s take a long-haul trucker as a simple example of how societal behaviors are changing. It has always been regarded as a hard and respected man's job. To feel the weight of it yourself, you would need to drive a 60s truck for a week. Then, it would become clear what being a long-haul trucker means: knowledge of the engine and suspension, ability to adjust the ignition, and so on. The trucker was qualified as a mechanic and locksmith at least – these competencies guaranteed his relevance as a specialist.

Today, power engineers occupy the top levels in terms of salaries among engineering specialties, and this is justified: both the well-being of people and the operation of expensive equipment depend on them. The situation progressed according to one scenario for a long time: the efficiency of electric and thermal machines increased during consolidation, and there were few top-ranked specialists who could service these machines. The industry’s centralization is a consequence of the technological mode that has developed in the absence of a digital environment for the management of decentralized systems. In such circumstances, power-energy specialists were (and still are) the “the upper crust” of the industry.

But the technological mode is changing, new generation methods are emerging, old ones are being improved, digital infrastructure is being formed – all of which is allowing for the fostering of fundamentally-new relations between the players. Previously, traditional generation had an advantage: small systems, which were created for narrow specialists like geologists, were expensive and ineffective in comparison with giant turbines. But they constantly improved, and eventually began to attract the attention of consumers. As the efficiency of these systems increases, their reliability increases, and thus the need to maintain them decreases.

New energy paradigm

“Small generation” is not just becoming more reliable – the efficiency of such systems is already comparable to that of large installations. A modern power plant’s efficiency is about 44%. And 50% in the combined cycle. According to various estimates, grid losses range from 7-8 to 30%. At the same time, each link in the energy-transmission chain increases its cost, i.e. those who produce gas, oil or coal, and those who deliver fuel to the station – and the power plant itself as well as the grid – should earn money.

Let’s now imagine that we have a small system called a solid oxide fuel-cell generator. It converts gas power into electricity and has a 65% efficiency, while making it possible to exclude the power plant and grid from the chain of intermediaries. As a result, we eliminate losses, and our electricity bill is cut in half. And, importantly, the amount of harmful emissions into the atmosphere is also halved due to the increase in efficiency. In Western Europe, there are already thousands of such systems – their installation is subsidized by analogy with solar panels. Their value is already starting to decline as production increases.

The spread of small generation is changing consumer behavior: they’re becoming a power engineer themselves. At the same time, grid-complex digitalization is underway: the consumer is able to calculate how much energy they need to generate for themselves, and they can sell the rest to the larger grid. And here’s what happens next: if the consumer has learned to generate energy and been able to sell the surplus back to the grid, it means that they have acquired a business model for production and sales.

The banking sector is also connected to the process: understanding the service life of a power unit guaranteed by the manufacturer, generation volume and the cost of energy, a bank easily issues loans for such a purchase to a “consumer-producer.” The circle has closed, a new paradigm has emerged.

Of course, this isn’t a rapid process, because we’re talking about the formation of a brand-new industry: a sufficient number of such small systems has to be produced, the technicians who will service them have to be instructed, the banks expected to work with this business model have to be trained. Nevertheless, the industry faces inevitable changes.

The smaller the scale, the higher the reliability

As technology advances, the reliability of small generators increases – but that's not all. Distributed generation increases the overall stability of the entire power system.

Large-scale blackouts at traditional power plants (like accidents in Ohio) are quite rare, but that doesn’t mean that systems are working normally the rest of the time. The consumer does not always know that a failure has occurred: during an emergency stop, the excess capacities of neighboring stations are connected or grid-flows increase. And yet, every accident that doesn’t lead to a blackout represents the exploits of power engineers and a dramatic change in the regular operation of the grid.

Everything is different in a distributed system: if consumption parameters change at a particular site, if one or more generators fail, the system simply redistributes the load and continues to work in normal mode. The smaller the unit element, the more likely the system will be self-balancing.

The future of the energy industry

“Big” generation will not disappear: it will continue to be in demand in cities with a population of over one million and in industrial centers, where it is impossible to escape the traditional centralized model – energy-consumption volumes are simply too large. However, the need for such solutions will gradually decrease: there is no need to build the same power plants anywhere in Rwanda.

In addition to the generators themselves, storage systems will be actively developed – this is another component of the new paradigm in the energy industry. Such decisions are currently under development. Their emergence, in turn, will allow for the safe transmission of energy over long distances. And those who now “command the wires” are unlikely to welcome this stage.

Today, energy transmission is a huge source of income for certain companies: countless funds are spent on energy transmission, the maintenance of power lines, the work of teams. That’s not to mention the fact that part of the energy “goes elsewhere.” For example, the debts of illegally-existing enterprises in the North Caucasus are charged to the population, as a result of whichdebt reaches 60-80% in some republics.

Under the new energy paradigm, such situations should be a thing of the past. Sooner or later, "energy containers" will be available for fast delivery to anywhere in the world – just as cylinder gas used to be transported. This will not only free up funds that were spent on maintaining grids and "energy leakage," but will also help to restore the ecosystems that numerous power lines are currently "cutting."

And in this reality, there will be a place for little birds again.This material is published on the Forbes blog platform. The author’s opinion does not necessarily reflect the position of the editorial board.

Source: Forbes

  • See also: