The Future of Electricity: Attracting Investment to Build Tomorrow's Electricity Sector
- January 20, 2015 World Economic Forum
The electricity sector is undergoing an unprecedented transition. In the past, the sector provided affordable, secure and reliable electricity by attracting investors with low risk, stable returns. In the last decade, significant declines in the cost of renewable technologies, combined with new sources of natural gas, have offered the opportunity to simultaneously decarbonize the sector while also increasing energy security and reducing dependence on imported fuels.
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OECD countries have invested heavily to achieve this, spending $3 trillion on new renewable and conventional power plants, transmission and distribution (T&D) infrastructure, and energy efficiency measures. This investment has helped reduce carbon intensity per unit generated by about 1% per annum and increase energy security by reducing imports of fuels by about 4%.
Yet more has to be done, especially as the industry is less than 30% through the process, with a further $8 trillion needed from now until 2040 to meet policy objectives.
The experience of the EU—an early mover—raises concerns over the ability to attract this additional investment. As renewable capacity has been deployed in the EU, returns on capital have fallen across the board and risks for investors and technology providers have risen due to policy instability. This crisis of “investability” has highlighted lessons for policy-makers, regulators, business and investors, whether in the developed or developing markets.
To attract the necessary investment, all key stakeholders need to take action.
Policy-makers need to create policy frameworks that are efficient, stable and flexible, recognizing the inherently uncertain technological and economic environment we live in.
- Plot the most efficient pathways to policy objectives. Incentivize “no regrets” investments such as energy efficiency technologies, demand response services, and the upgrading of network and generation plant efficiencies. Exploit the most efficient renewable resources within and across borders.
- Stabilize policy by building in flexibility and working to increase societal support. Recognize inherent uncertainties by investing incrementally. Communicate the value to society of the investments. Reduce investor risk by prohibiting retroactive policy changes.
Regulators need to provide clear direction to markets, while minimizing interventions.
- Ensure clear, effective signals: Provide a clear, stable market signal on carbon pricing to incentivize decarbonization. Reward efficiency, reliability and flexibility, encouraging predictable, dispatchable, fast-responding supply to complement growth in demand response solutions in balancing increasingly volatile supply and demand. Recognize in network tariffs and regulatory frameworks the value of reliable grid capacity.
- Create “level playing fields” across geographies, businesses and technologies: Harmonize incentives, encourage appropriate physical interconnection and remove unnecessary regulatory barriers to competition between incumbent utilities and new entrants.
Business and investors need to drive innovation in business and investor models to secure the necessary investment.
- For businesses, continue to engage with policy-makers and regulators to identify the most efficient pathways. Evolve strategies and business models that exploit the opportunities in the evolution of centralized generation while also supporting the rise of customer-centric offerings and propositions.
- For investors, engage with policy-makers and regulators on how best to balance risk and return to attract the required investment. Continue to innovate in investment structures to finance the evolving risk profile in different parts of the electricity value chain.
While there are many ongoing debates in global energy policy and regulation, these areas of general consensus offer a clear path forward for the transition in OECD markets, a journey that will be watched carefully by developing nations.
Finally, as no single cross-stakeholder body exists, developing a joint, cross-geography, multistakeholder task force is recommended to increase communication and share lessons and best practices across borders and throughout the industry. This would help address the currently “atomized” nature of supervisory and regulatory decision-making bodies. Only by ensuring the viability of investment can policy-makers successfully transition to a more sustainable and efficient energy future.