When I talk to executives from European electric utilities, it’s clear that this is Europe’s moment to lead the way on building the energy system of the future driven by deep decarbonization ambitions and digitization. But how and where to start? Here are some reflections on the road ahead.
Before 2020, most European utilities were already strongly involved in Europe’s Energy Transition journey. But there’s now a new tailwind: that of government stimulus in the wake of COVID-19, hot on the heels of the EU Green Deal. These government recovery packages make for a fantastic opportunity to accelerate a green recovery, rebuild Europe’s infrastructure, and transform industries and cities for a zero-carbon future. The next decade will be the decade of massive transformation of the European energy system.
Meanwhile, many of the technologies to make it happen are already available, their costs are decreasing, government incentive schemes and regulation are shaping up—and the business opportunity is increasingly compelling. And most importantly, energy consumers (residential and industrial) are asking for decarbonization of energy and their own supply chains.
Europe is moving into execution mode
Collectively, if we do it right, we create jobs, shore up Europe’s competitive position, and become a leader in energy transition solutions and services—both in developing and scaling new technologies, as well as in new business models and consortia to drive the change. To do that, European Utilities must act now to soar on that tailwind, and deliver the action we need this decade.
So how do we get there? While there are no quick fixes, what we’re seeing now is a framework coming together for action, combining the right regulatory environment, government support and an increasing understanding of System Value— the idea of evaluating portfolios of solutions beyond cost.
That value includes benefits for business and society like net CO2 reduction, clean air and health improvements, job creation and energy systems that are resilient, reliable and flexible. These solutions can push Europe along the Path to Maximize System Value past its current transformational stage towards a net-zero integrated energy future by 2050.
Main solutions in addition to the ongoing replacement of conventional power plants by Renewables include:
- Electrification of transportation (EVs for short range and personal cars, fuel cell/hydrogen for heavy transport/marine).
- Electrify light industrial demand, for example via rooftop solar, utility-scale solar or onshore wind.
- Scale green hydrogen as high heating processes such as steel manufacturing, uses as feedstock in the chemicals and fertilizers industry.
- Capture waste heat and re-purpose into other industrial processes and/or district heating.
- Pursue efficiency and demand optimization opportunities to improve cluster system efficiency and for industrial plants to participate in balancing/flexibility markets.
- Develop and install pre and post combustion CCUS capabilities to capture CO2 from industry and power stations throughout the industrial cluster.
- Develop CO2 transport and storage infrastructure.
- Develop blue hydrogen plants with hydrogen infrastructure.
- Conduct electrolysis from offshore wind and utility scale solar to produce green hydrogen, which can be integrated into hydrogen infrastructure.
Five levers for success as utilities accelerate their progress
#1: Take action today: Focus on innovation, scale new business activities and build a competitive edge
To make this transition real, innovations must be scaled effectively (beyond proofs of concept or pilots) to drive cost reductions and move past subsidies and governmental incentives. Over recent years, we have seen the cost curves of solar and wind decrease massively and fast. Why? Thanks to orchestrated global scaling of those technologies, supported by governmental policies and incentives. Economies of scale are needed to reach the tipping point—clean technologies and solutions reaching parity with fossil technologies. Once the tipping point is achieved, there is no way back and scaling will be driven by natural demand.
The energy transition in Europe, the decarbonization of industries and electrification of society provide a unique opportunity for the European industry to create a competitive edge that will re-enforce the power of the European economy and support export opportunities to the rest of the world.
#2: Think with a customer mindset, from demand to supply, across the value chain, end to end
Innovation in the energy transition arena should be considered as a system play—an approach that bridges demand and supply together to deliver the envisaged outcome. The demand will drive the supply and the supply will generate demand if done in a meaningful way (think chicken and egg).
As an example, if there is no demand for green hydrogen, or the price is too high, it will not be produced. A new hydrolyser will not automatically generate demand if the transportation infrastructure is not in place and the end customer is not willing to buy the end solution at a potential premium (e.g., steel produced with green hydrogen delivered to an automotive manufacturer; green steel inside).
The same chicken and egg scenario exists with the deployment and scaling of electric mobility. The right incentives are needed to make the cars affordable; the charging infrastructure needs to be realized; the cars need to be available. If charging isn’t easy and ubiquitous, having an electric car won’t get you very far. Tesla recognized this and decided to deploy their own supercharging infrastructure (free of charge) to make long distance travel across the continents possible and resolve the chicken and egg problem. They thought of it as a system, in which competitively priced electric cars + great customer experience + easy charging can genuinely move the market.
The system needs to scale across the value chain, from supply to demand, in an orchestrated way at the same pace along a joint long-term agenda.
#3: Work the ecosystem, create cross industry partnerships with skin in the game, and kickstart with an industrial cluster approach
No single company can create the future. Nor can a single industry sector. You have to think of your business as part of a cross industry ecosystem—interacting and collaborating with others. Sector convergence and sector coupling are the name of the game. The perfect example is the industrial cluster, where interdependent industries are co-located.
The idea of a system play will need to be scaled up for bigger success in broader areas. It’s about thinking in connected ways, and collaborating in e.g., a consortium, joint ventures and so on. Aligning risk and reward, having skin in the game on a joint agenda.
Industrial clusters such as the Rotterdam harbour area and Nordrhein-Westfalen are perfect for kickstarting system transformation in the heavy industry arena. Companies are co-located, limited transportation is needed, communication is easy, as is aligning on a joint agenda with support of local authorities. This can be seen as a micro-ecosystem and living lab that enables collaboration across supply and demand and scaling in a relative controlled model.
And the system value potential is large, with Europe’s 3000 clusters already representing 54 million jobs, and more on the horizon.
#4: Design with data, artificial intelligence (AI) and digital at the core
Data, AI and digitalization are at the core of the energy transition solutions and underpin the acceleration that’s needed. Collaboration, new business models, demand-supply balancing, energy efficiency, smart charging, smart cities, connected industries, cross-industry carbon tracking & tracing, are all underpinned by data and digital technologies. They enable new smart and connected solutions, drive down costs and create the right customer experience to enable adoption at scale.
Entrepreneurship, digital skills, creativity and agility are defining the workforce and operating models needed to thrive in the next decade. It sounds obvious, but more than ever, having the right people on the bus is key.
#5: Balance the now and the next, but the energy transition winners are the ones that master the how
Pursuing investments and new business in the energy transition arena is a delicate balancing act: you have to allocate enough resources to new ventures and business, while continuing to transform and optimize the existing business.
To accelerate Europe’s energy transition, businesses should play both the short and the long game. This means making smart moves now to prepare for the future—knowing that ROI is not immediate—while keeping the business viable in the midst of uncertainty.
The end game in 2040 is relatively easy to imagine, with most of the technologies already available today to make it real. But the devil is in the detail and in the execution. Many companies I talk to had a good strategy on paper but failed in the execution. The strategy is only as strong as its execution. And by 2030, the winners will be those that can define the how—and more importantly, deliver on it.
European utilities are well positioned today to light the way on the roadmap to net zero. Contact me to find out more about how.