8 trillion needed for electricity goals, say WEF & Bain

26 January 2015 Consultancy.uk

In a report released for the World Economic Forum by Bain & Company, the current state of electricity sector is mapped out. The authors highlight that while the sector has come a long way in its transition towards a more sustainable footprint, the industry still has a long way to go. For the climate change policy objectives to be met, a massive $8 trillion will need to be invested in the years up to 2040, on top of the already $3 trillion spent between 2000 and today.

In recent decades climate change has grown to become one of the key agenda points for policy makers and executives worldwide. The American Senate for example recently voted 98-1 that climate change is “real” and not a “hoax”, something scientists have long had evidence for and stated loud and clearly. And while there continues to be debate on the cause, the vast majority of scientists agree that human activity has a detrimental impact on climate, and that it might well be advisable to reduce as much as feasible. To protect the environment, policy makers from OECD* governments have years ago agreed dozens of counteractive measures across industries, such as regulation, voluntary agreements, Emissions Trading Systems, all with the objective to oblige, or incentivise players within the energy industry to move toward a lower-carbon system.

The Future of Electricity - Bain & Company and WEF

To meet energy policy objectives, the International Energy Agency (IEA) estimates that an investment of $7.6 trillion through 2040 will be required from countries in the OECD. Investment will be required across the board, in conventional and renewable, centralised and decentralised capacity ($180 billion annually), and the expansion and modernisation of transmission and distribution grids ($100 billion per year). Yet for a sector that finds itself in a state of rapid market and regulatory change, with pressure on financials the result, the mega-investment and transition required brings along massive challenges for policy makers. In this context, the Energy community of the World Economic Forum decided to, in collaboration with Bain & Company, launch the ‘Future of Electricity initiative’, which aims at informing leaders in the industry how they make the electricity sector more sustainable for society.

As part of the initiative, WEF and Bain & Company have released the report ‘The Future of Electricity: Attracting investment to build tomorrow’s electricity sector”, which summarises the key findings of the research programme. The authors conclude that there is an “unprecedented change” within the energy sector, and while the sector was historically considered a safe bet for capital, today there are a number of changes to the sector which are driving uncertainty. If not tackled adequately, the uncertainty may inhibit investor confidence at a time when nearly $8 trillion will need to be invested.

High levels of investment will need to be maintained to 2040

Investor hesitance
Finding investors to supply both the capital for direct investment and technological development is becoming more difficult to secure. The traditional stability of the market place has been disrupted by the changes in the past decade, with the return on investment dropping for instance by 4% in Europe between 2001 and 2013 – the drop partly attributed to a cutback on subsidies for renewables. Other factors affecting the EU’s decrease in the return on capital in the energy sector are related to falling demand, significant overcapacity and reduced load factors and wholesale price declines. These factors, according to the authors, are less likely to create the investor confidence required to meet the needed move toward lower carbon pathways for the OECD as a whole. To bring in investor capital “all key stakeholders need to take action.”

Returns have declined for and US Utilities

Policy clarity
The report identifies a number of key areas in which policy makers may be able to stabilise the energy environment for investors to gain confidence in the returns on their investment. There are three broad categories in which policy changes need to set up the right incentives for investors, according to Bain et all, this involves creating policies that are “efficient, stable and flexible, recognising the inherently uncertain technological and economic environment we live in.” Create the conditions where “Regulators […] provide clear direction to markets, while minimising interventions.” And have “Business and investors […] drive innovation in business and investor models to secure the necessary investment.”

Key recommendations

The authors end on an optimistic note, stating that by creating the right regulatory conditions that create the most efficient pathways towards the energy objectives, within a stable playing field in which businesses have a general grasp of the certainties and uncertainties facing them in the continuing transformation – a conducive and stable policy environment will allow the required investment to meet the long term objectives.