Energy Transition Outlook 2017

NARRATOR Welcome to the DNV Talks Energy podcast series. Electrification, rise of renewables and new technologies supported by more data and IT systems are transforming the power system. Join us each week as we discuss these changes with guests from around the industry. 

MATHIAS STECK Welcome to the new series of DNV Talks Energy. My guest today is Ditlev Engel, the CEO of DNV - Energy. Good morning, Ditlev.

DITLEV ENGEL Good morning.

MATHIAS STECK Ditlev, we want to talk about DNV’s inaugural Energy Transition Outlook 2017, the world model of the energy system up to 2050. Now, looking around, there are many reports out there, trying to forecast the future of the energy sector, so how does DNV’s Energy Transition Outlook stand out?

DITLEV ENGEL Well first, for the listeners who may not know us that well, DNV operates in five different areas. The maritime area, the oil and gas area, the energy area, that I represent, the business assurance area, and the software area. And these five divisions, actually, in their day-to-day lives, spend 70% of their time working on energy-related issues. That means that of the 13,000 people working at DNV, energy is by far the most predominant theme of everything we do.

When we were listening to our customers, and the challenges they’re seeing in the whole energy transition, I think everybody knows that it’s going extremely fast. We thought it was prudent to sit down and say, shouldn’t we try to model what will this look like, because we are actually having our, so to say, fingers in the pie every single day, across the company. And we did it, to build a model based upon dollars - meaning that the energy transition obviously will be driven very much by the cost and the expected cost going forward. So, what we’ve done, and this is where it really stands out, is that because we are in this epicentre of what’s happening within energy, we have used that knowledge from the organization, also talking to external parties, and then tried to model, based upon the expected future cost, what will that mean for which technologies will move fast, which will move slower, we may disappear, and that has been the driving force. I think it’s important to say that this stands out here, because a lot of others are making scenarios - what if this happens, what if that happens? We don’t deal with that, what we deal with is dollars, and we do believe that those costs of energy will prevail for society.

MATHIAS STECK Right, so what would you say are the most important findings of the Energy Transition Outlook?

DITLEV ENGEL We launched it in early September, in London, and we’re now here in Singapore by the end of October. So, based upon the last two months of feedback, I think from the questions we got from the media, from customers, etc., I think there are maybe three or four points that stand out the most. I think the first one is that we are saying that energy demand will plateau in 2030, and that will be the first time for mankind that that will happen, so that’s a significant change. The second thing is that we are seeing the world electrify extremely fast, so electrification of societies will go, I think, much faster than people will anticipate. The way we’re going to electrify it will also be very different. In fact, we are saying that by 2050, we will have 50% coming from a non-fossil, and 50% from fossil. That means that the uptake of renewables, in particular, wind and solar, is going to be very, very strong. Those are two important ones. Our third point is also the fact that we are seeing EVs, electrical vehicles, moving rapidly ahead, and that is having a profound impact on the total expectations to the split of the consumption of energy. We are seeing, for instance, due to that, the role of oil is going to peak in this period, and being taken over again from the electrification. So, this shift in the way that we’re going to be transported in cars is a major game changer in this scenario. Then, maybe, fourthly and equally important, energy efficiency, which is sometimes overlooked in the whole energy transition, is going to have a very predominant role going forward.

MATHIAS STECK Right, so you mentioned oil peaking, when I remember that correctly, the report says it happens in 2022, and this is, of course, also an important message for our own business; we are, ourselves, in oil and gas. I think we have been asked also about this scenario, so what does it mean, for example, for the oil and gas industry, what do they have to do?

DITLEV ENGEL Right, I think, first, it is correct that we see that it is plateauing around 2022; but then it does not drop off a cliff, it will stay fairly stable, but it is plateauing around 2022, is what we are forecasting. What we’re also forecasting is the gas will play a much more dominant role going forward, actually we see gas becoming the largest source of energy up to around 2035. So, obviously, again, there will be a shift, and the main reason for the oil is actually what I mentioned on the electrical vehicles, and the fact that we will switch from using the combustion engine, into using batteries for transportation.

MATHIAS STECK Maybe we can talk a little bit about the electrification, which you just mentioned, and the importance of renewables. I understood that the demand for electricity will grow by 140% over the simulated time, but at the same time, we see that the primary energy demand is going down. So, maybe you could explain how that miracle comes.

DITLEV ENGEL How can that happen? Well first, as I said, the energy efficiency, meaning that because we will combine things in a new way, Internet of Things, we will have much more efficient houses, more efficient radiators or refrigerators, etc. So, everything will have a much higher degree of efficiency of all of the appliances that we use. The fact that we’re also shifting to renewables means that they have, actually, a higher efficiency compared to, for instance, coal, because we see coal going down a lot, where you have an efficiency around 35%, and renewables, you are like 80-90%. So, that is going to have a big change in the efficiency of the electricity consumption. Then, we have to say that we, as human beings, and it’s good news, is we will be much better at the energy we use, because the Internet of Things, and the connectivity will mean that we will use less energy per person. All this is leading to that we will spend much less energy compared to the past. So, we are seeing an economy that will be growing, that’s not the issue, but we’re actually decoupling economic growth from energy consumption, which normally, you have, been like twins going hand-in-hand.

MATHIAS STECK Right, so I remember that the GDP is now growing much faster than we see, for example, the population growing - and you even maybe see the energy demand going down. So, as you mentioned, it’s a simulation based on dollars, we also get more value out of the kilowatt hour, probably. Having heard what you say, it’s a tremendous change for the sector, and that will probably also come with tremendous costs. So, while we see that things might move that way, can we actually afford to have this transition?

DITLEV ENGEL Well, today, the short answer to your question is yes. So, first, I think, everybody - I just mentioned, renewables are moving fast ahead - and I think anybody, having been watching this sector, will see now what you pay for wind and solar today, compared to what you paid ten years ago, has been a dramatic reduction. We don’t see any reason why renewables is not going to stay at a very low level, and costs will keep going down. As we’re making this energy transition, we will keep adding, actually, what is quite cheap, and fast scalable, manufacturing equipment from renewables. And that means, overall, that we are spending, in the global world today, about 5% of GDP on energy across the world. But because of the high efficiency, the higher Internet of Things, integrations and new possibilities, uptake of renewables, we actually see that the total cost of energy that we will spend in the world, will go down to just above 2%. Which actually means, then, if you look at it from the real global picture, there’s actually money to be gained by making this energy transition, because we will get, so to say, more bang for the buck, by making this transition. But of course, we still have to make significant investments into transmission and others, so we have to do a lot, but we get, so to say, a better deal every day.

MATHIAS STECK That sounds all very positive, the fossil fuels getting down to maybe 50% of the energy mix, are we saying that reaching the COP21 target, the Paris Agreement, 2 degrees is not a challenge anymore?

DITLEV ENGEL I have to say that when we were working on it, and when we had the results presented by our excellent colleagues, who have done this magnificent work; I think we were all very excited because we were seeing a world where this was going, maybe, much faster than one would have hoped for. Until we got to the calculation of where does that leave us on the expectations to increase of temperature - and the scenarios that we are describing in the energy system outlook is actually forecasting around a 2.5 degrees Centigrade world, and as the Paris Agreement was to go from 1.5 but nowhere above 2 degrees C, and now we are forecasting, even with, I think, what many will characterize as a very ambitious Energy Transition Outlook, is still not enough. So, this means that the speed of implementation is still of essence, and really important. Secondly, it’s also very important that we be thinking much smarter about the way that we manage what we have left of the carbon budget. What is a carbon budget? I think the best way to describe it is if people were thinking about their own savings account, and saying, I have $100 left, should I spend them all tomorrow, and then I’ll have zero? Or how do I spend the last part of the budget wisely? We know that there are industries like airlines, ships, that you will need to use, going forward, but what can we do to de-carbonize them, even though we cannot eliminate it going forward, what can we do to try to preserve what we have left to spend, to stay within the 2 degrees C. I think that is a very important challenge as well, while making the energy transition as fast as possible.

MATHIAS STECK Right. So, knowing all of this, what we found out in this report, where do we go from here? What can be done to close the gap?

DITLEV ENGEL I think there are a few very important issues. So, normally when we talk about an energy transition, most people talk about what will utilities do, what will the consumers do? But we should not forget that some of the biggest customers in the energy sector are businesses. B2C companies, B2B companies, and here at the conference yesterday, in Singapore, actually, a gentleman from Google mentioned that they had, I think, more than 6 TW of annual consumption; and they at the same time, are issuing new agreements, but only based upon renewable power. So, I think it’s important to remember here that this is such a big issue, which is way beyond just the traditional energy sector, they, of course, are a very important player, but also we will see a lot of new engagement with new companies, so I think being open-minded, integrating with a lot of new players, is the way we will get faster to the solutions. Because it’s not just a question of what the energy sector should do, it’s also very much the question of how will the energy sector work across the whole value chain, with our clients. And whether it is a company like Google, with data centres and so on, but also with the finance community, which, for instance, energy has also a big focus. Because the finance segment is struggling to find out how to handle, how to ensure, for instance, climate change. How are you going to take out an energy policy or insurance policy? Is this area’s going to be flooded tomorrow? I think these are some of the things that makes it very important that we have a very open dialogue across the whole value chain, whether it’s from financing and other parts of business. So, cooperation and integration of all stakeholders, and of course, also the policymakers, so public/private partnerships. I think it’s very much the theme of saying hello to everybody, is absolutely essential.

MATHIAS STECK Right, so of course it’s, I think, a very good contribution to the industry; and I understand DNV also takes a responsibility to refine the model in the years going forward. That was the inaugural version or edition, so I think next year we might see if we were right, and can adapt, maybe, the model when we have more data as input.

DITLEV ENGEL Yes, of course, this is the first time we launched it, and we’ve been delighted with all the positive responses we have been getting from business partners, colleagues, clients, etc. Therefore, I'm also pleased, as you mentioned, that we will do it again next year, because the transition is obviously, I think, somebody here also at the conference talked about this is close to a revolution. And because things are changing so rapidly, it makes it, let’s say, even more sense to make sure that we are looking at it every year. So, next autumn, yes, we will come out with the next edition, and of course, it’s be interesting to see if there are some new delta points, compared to what we are seeing today.

MATHIAS STECK Right, thank you, Ditlev. Unfortunately, it is slowly to coming to an end of this episode already, but I have one last question, because we are recording here live from the Singapore International Energy Week, what is your biggest takeaway from the Singapore International Energy Week, in 2017?

DITLEV ENGEL First, I think the theme about rethinking is extremely appropriate; and I think everybody knows that Singapore is a pioneer in many areas, and also within the energy area. So, it’s always very exciting to hear what Singapore has on their minds. At the opening speech on Monday, where the Deputy Prime Minister mentioned that Singapore will introduce a carbon tax in 2019, is something that has been debated in many countries, and now he confirmed that Singapore will do that. And of course, he also, at the same time, mentioned that, of course, Singapore’s, let’s say, emissions in the global scheme is not the largest, but it is, again, an important, I would say, lightning star in the Asia region for how to develop to the next system, and making sure that Singapore remains the pioneer on finding new solutions, and drive more energy efficiency and integration of renewables in new ways. So, I don’t know what the theme will be next year, but I'm sure that this rethinking is also something that Singapore takes close to heart, and also showing that the policies will support that going forward, and I think that’s very comforting. Then, I would say the other takeaway is that there are so many things going on here, and this is why it’s such an exciting industry, and people coming from all over the world, so people are not just rethinking, I think people constantly are reconnecting, and that’s also quite nice by being here.

MATHIAS STECK Thank you very much, Ditlev, for your very relevant insight and the good summary of DNV’s inaugural Energy Transition Outlook 2017. To the listeners, thank you very much for dialling in, that was Ditlev Engel, the CEO of DNV - Energy. And if you want to have your own copy of DNV’s Energy Transition Outlook, please visit https://www.dnv.com/energy-transition-outlook. I repeat, https://www.dnv.com/energy-transition-outlook. Thank you for listening.

NARRATOR Thank you for listening to this DNV Talks Energy podcast. To hear more podcasts in the series, please visit dnv.com/talksenergy.