I was at a conference the other day and one of the big questions was whether we were in the middle of an energy revolution or whether it was a transition or as the German’s call it an Energiewende. There was also some input on how our power world would look like in 2050 and the conclusion from one presenter was that we were not in a revolution and that we were going through an evolutionary period of change. I had to interject with two questions, if we had all of have been sitting in this room in January 2008 how many of us would have predicted that the oil price would be $50 today (it was $85 then) and that continental European power prices would be below €35 (they were €90 back then). Of course there was silence in the room as nobody among all the energy experts in that room would have got those questions right. The reason is that revolutions by their nature are unpredictable…
And that revolution is clear to me is caused largely by two technologies, one drilling technologies which have already radically changed the US gas market and increasingly the global oil markets and renewables which have already torn apart European power markets and are set to do the same in the U.S., Japan, China and other markets.
Drilling technology advances
- Hydraulic Fracturing. Fracking, as it is more commonly known, involves fracturing a rock using a hydraulically pressurized liquid which comes in handy with “tight” reservoirs where the rocks containing the oil do not have large holes in them.
- Seismic Imaging. This technique relies on the idea that sound travels through and bounces off different materials in distinctive ways and thus can be used to more accurately locate oil.
- Measurement-while-drilling (MWD). This technology allows the drilling machine to receive and use real-time information on the drilling process as well as steer the well in different directions.
- Digital Oil Fields. The use of web-based visualisation platforms is becoming common and allows oil firms to effectively measure, analyse, control and use all of the data coming from the oilfield.
The result of these technologies is that it is now possible to access gas and oil that was previously inaccessible and to do so at economic rates. And the US production numbers speak for themselves. In 2008, the U.S. produced 6.7m barrels per day of oil (and oil equivalents). In 2014, it was 70% higher at 11.4m barrels. U.S. gas production has risen over the same period by 27% to 70 billion cubic feet per day. Now if that is not a revolution I do not know what is!
In terms of renewables we have already seen wind become competitive with fossil fuels across a lot of countries and as the technology has improved installations have increased. So for instance, in 2014 there were circa 43GW of new wind capacity installed across the globe. This is up 60% on installations in 2008 (27GW).
However the most revolutionary renewable technology is solar which is more flexible and faster to install than any other power generation technology. It can be used to provide power to pocket calculators or for utility scale power plants. PV modules can be mounted onto our roofs or facades, or they can be configured in large-scale plants. Plus, installation is simple and quick. In 2014, the global market for solar was circa 45GW up a massive 650% from the 6GW installed in 2008. We have never seen a power generation technology grow so quickly and this year solar is likely to become the No1 power generation technology in terms of new installations!
The result of these renewable generations can be clearly seen in the European power market where over the last 5 years nearly 100 GW of renewable energy capacity have been constructed across the European continent. Wholesale power prices have hit 10-year lows (to below EUR35/MWh!) notwithstanding the closing of significant nuclear generation capacity in Germany. And we have the amazing situation that it is the weather as opposed to the price of fossil fuels which determines the power price. And then we have the recent decision from one of Europe’s biggest power generators, E.ON to exit nuclear and fossil power generation to concentrate on renewables. Now if that is not a revolution I do not know what is!
The German’s call it an Energiewende, the energy transition. But in reality it is a revolution. The changes are so great that they are impacting the way we interact with energy at all levels – across each of industrial, building/home, transport and personal energy management environments. And there is more to come: electric cars, fuel cells, the expansion of renewables and the expansion of the new drilling technologies across the world not to mention efficiency technologies such as LEDs.
What does this all mean….we are in for big changes ahead. On the one side, the business models of incumbent energy companies will be under pressure. On the other hand, creative destruction will ensure that new ideas and business models will succeed. It is going to be an exciting place to be especially in an industry where the names, the ways of doing things and the technologies have not changed much in a century!