Renewed Focus on Sustainability & Decarbonisation: An Expert View

Expert interview with John Raspin, Partner Energy at Frost & Sullivan

Good morning, John, and thank you for joining us for our Expert Interview. You have been tracking the energy market for almost 25 years at Frost & Sullivan. I can’t think of anyone better to quiz on this topic!

Arvensis: I read research last week that a staggering 86% of consumers want to see a more sustainable future and a ‘green recovery’ following the 2020 pandemic. Most consumers are now aware that decarbonisation is the key to a successful green recovery and we are seeing huge strides being made in energy transition. What is Frost & Sullivans’ estimate of the value of this market and how has this changed since the 2019 POV, pre-pandemic to post-pandemic?

John: I very much agree with this sentiment and I’m not surprised at all about the 86% of consumers.  We’re also seeing the World Economic Forum (WEF) talking about the ‘Great Reset’ and a new energy order.  And the UN pushing for green recovery packages, while the International Energy Agency (IEA) talks about the need for greater investment in clean, secure and sustainable electricity systems after the Covid-19 crisis.

Decarbonisation is at the centre of this and don’t forget the energy transition was already firmly established before the pandemic.  Energy investment has been pretty resilient through COVID and Frost & Sullivan’s future investment projections are up around 10% on pre-COVID levels.

But while COVID has triggered a renewed focus on sustainability and decarbonisation, there’s also been other major events in the past year that raise positivity.  Green stocks in the US jumped more in November 2020 when Joe Biden won the US election than at any other time in recent years.  And he’s backed it up with a power net zero commitment by 2035.  And President Xi has committed to China’s carbon emissions peaking by 2030. So both China and the US now seem very serious about emissions reduction. 

A: Frost & Sullivan forecasts that investments related to energy transition toward renewable energy are expected to increase, while coal takes a downturn in most developed markets. What are the top investment areas and which power source are likely to take the lion’s share?

 

$545 billion investment for renewables by 2030

 

J: We saw close to $400 billion invested in power generation in 2020 – close to $300 billion of that is renewable, with solar at $150 billion and wind power at $110 billion.  By 2030 we expect $545 billion to be invested globally per year (despite continued reductions in technology and project costs) and renewables will be $420 billion of it – again dominated by solar and wind.

With the cost of capital so low at the moment and renewable energy demand growing, there’s going to be some good years ahead for wind and solar power. 

A: I read that the energy storage market is forecast to grow by approximately 25% over the next 5 years – how does Frost & Sullivan forecast market demand for energy storage given that the shift to renewable energy, storage will become a critical part in the value chain?

 

Energy Storage Market to grow $47 billion by 2030

 

J: Well, I definitely agree about the criticality of storage and the high growth potential. Our forecast is a bullish 25% growth per annum.  That means a market of $6.5 billion in 2019 growing to $25 billion by 2025 and $47 billion by 2030.  Solar with storage is an increasingly standardised proposition at the residential and commercial/industrial level, and the number of mandates requiring utilities to have a minimum amount of storage are increasing – many US states already have them, European countries will either follow suit or are creating mechanisms to facilitate investment in grid-scale storage.

A: What opportunities are there for digitalisation and power storage to transform the power market?

J: Digitalisation is a huge opportunity and it’s very exciting.  Of course it’s been building momentum for quite a few years now but COVID has resulted in an acceleration of innovation by creating new use cases.  Things like data monetisation, online sales, IoT, cloud services and big data analytics are now fully front of mind for players in the sector.  And the acceleration of Industry 4.0 is driving human-robot collaboration, service personalization and more interactive products.

In power generation one of the key themes is the use of digital twins (having an exact model of the asset so you can test various scenarios on it and see the impact).  This also opens opportunities for embedding sensors to enable predictive and prescriptive maintenance and using alternative reality (AR) and virtual reality (VR) tools.

Power storage transforms the market as it reduces the curtailment of renewable assets (so taking them offline and wasting the electricity they produce), and enables consumers to become prosumers (both producers and consumers).  But for many it’s actually more about increasing self-consumption and saving money. Also storage enables companies to be active in the grid services market and generate revenues from ‘value stacking’. 

A: What are the main barriers for legacy businesses to pivot and create attractive solutions and business models to fulfil the opportunities that will emerge this transition?

J: The economic conditions are very tough for gas plants in many markets as renewables and storage take an increasing share of the market and this cuts peak generation revenues.  It’s hard for these larger assets just to switch modes easily and it puts financial pressure on the companies. 

A: What are the key reasons for these barriers and what would your best practice advice be for overcoming those?

J: Well it’s not easy but for new construction projects firms need to think hard about the assets they’re investing in and the lifetime value they might have.  For Existing assets it’s about focusing on reducing O&M costs where possible with digital-based solutions.  There will also be short and mid-term potential revenues from capacity markets (where plants are paid to be available).

A: Is there a regional aspect to success in electrification?

J: Not any more really.  Electrification of systems, processes, industries and buildings can occur anywhere, and is likely to bring opportunities across all markets.  The decentralisation of electricity supply means that weak grids will not be the barrier that they were in the past.

The electrification of transport and mobility is already a well-established global trend, and things like heating, shipping, mechanical drive, and other industrial processes are all poised for significant changes in coming years.

 

Growth for Li-ion batteries strong beyond 2030

 

A: Across the three core areas in storage, electronic devices, electric vehicles and grid-scale batteries –  where do you forecast the biggest growth opportunity?

J: Well electric vehicles (EVs) and devices are going to be the largest in absolute monetary value terms.  Grid-scale storage is a big market, but still a bit of a niche compared with the other two.  If you look at lithium ion (Li-ion) batteries in 2020, automotive accounted for $23 billion, industrial for $14 billion, consumers for $10 billion, and grids for $2.5 billion.

But the growth in grid-scale storage will be very strong.

A: You track start-ups and investment flows: what are the key opportunities for investors and entrepreneurs in energy production and storage?

I’d say artificial intelligence, machine learning and data-driven technology solutions.  As we move to increased automation and autonomy, the focus will be on clever algorithms to analyse a process and be able to deliver meaningful insights and results.

For example, virtual power plants (VPPs) have been a concept for many years now, but new innovation enables a wide range of disparate energy sources to be connected seamlessly to the grid and the technology unlocks additional value for the owners.  There’s been lots of M&A activity here (eg Shell bought Next Kraftwerke last week).

There’s also good potential for new battery chemistries and advanced new materials, but it’s already a pretty crowded field.

 

Talent is a core restraint for delivering growth

 

A: When we consider the change in the energy market that you have witnessed during your career and the forecasted shift towards decarbonisation, decentralisation and digitalisation – what are the key issues the executives you work with face in terms of talent acquisition and retention?

J: Let’s face it, the energy industry hasn’t always been seen as the sexiest sector.  Other industries have been seen as moving faster and being more innovative.  But things have evolved and will continue to change.

Technology is everywhere now and energy and sustainability are critical topics for the 21st century.  The leading players in the sector (from global giants to small start-ups) are visionary innovators now so it’s a very exciting area to work in. The execs in the sector just need to remember to position themselves as dynamic and innovative to attract the future bright talent.