Financing an investment in our future energy system
- Apr 2, 2017 6:14 pm GMT
The 2015 UN Climate Change Summit in Paris was a turning point for the energy sector, a watershed moment when it became clear that traditional avenues for doing business had to evolve to meet the demands of a changing world. With the clear majority of countries implementing new carbon reduction goals, traditional power generation methods like coal are becoming less popular, while more renewable forms of energy, such as wind and solar, will play an increasingly larger role.
In the U.S., many states are pursuing efforts aimed at reducing greenhouse gas emissions, encouraging a transition to more environmentally-friendly energy sources. And emerging mid-income countries such as China and Mexico have pledged to peak and reduce their total emissions within the coming decade.
Businesses should play a part in helping to reach such goals. That’s why, in 2015, Siemens was the first major industrial company to commit to cutting its carbon footprint in half by 2020 with an overall goal of becoming carbon neutral by 2030. One year into that pledge, Siemens has cut its CO2 emissions by over 20%. This is the result of switching Siemens buildings to more energy efficient methods of power generation and enabling clean energy projects. Like all transformations, however, there are investment challenges.
“In the short-term, investors can initially be deterred by high upfront costs associated with clean energy projects,” says Kirk H. Edelman, CEO of Siemens Financial Services’ (SFS) Energy Finance. “Energy projects typically require substantial amounts of capital from multiple sources to develop large scale energy projects, whether in renewables, conventional power or oil and gas.”
Over a longer period of time, critical areas such as planning, permitting, securing land, purchasing equipment, and construction are all major factors that can delay projects, underscoring the need for funding from multiple sources.
The need for new technology
“Success in transitioning to a global energy mix will rely on the implementation of cutting-edge technology, and financing can lead the way,” says Roland Chalons-Browne, President and CEO of SFS. Siemens’ involvement in Panda Power Funds’ “Stonewall” plant is an example of the role financing can play. Siemens supplied gas and steam turbines and generators for the project, making it one of the cleanest natural-gas plants in the U.S. For SFS, this was also an opportunity to provide financing that would attract more investors for the project.
The city of Orem, Utah, is another example. Orem chose Siemens’ Energy Savings Performance Contract to modernize its energy services to save the city $11.4 million over 15 years and reduce its energy output. This project was made possible through a tax-exempt loan structure from SFS to pay back the initial loan.
The deployment of new technologies is one of the catalysts driving the energy transition. While this is leading to significant uncertainties it also offers the possibility to reduce overall system costs, according to a recently published study from the Massachusetts Institute of Technology Energy Initiative (MITEI) titled Utility of the Future.
MITEI Executive Director Raanan Miller says the study’s research was “grounded in the real world” by obtaining perspectives from leaders across the electricity value chain. “The study seeks to provide a framework to enable an efficient outcome for the power system regardless of how technologies or policy objectives develop in the future and is based on analytical assessments and quantitative models,” says Miller. According to the study, de-carbonization of the power sector and consumer choice are two other catalysts that will give momentum to energy transitioning. Experts predict consumers will increasingly want to have a say in how electricity is consumed, chiming in on everything from minimizing costs to reducing environmental impact. The study’s authors propose a number of ways to meet this demand, such as the enhancement of distribution regulations and establishing financial independence with distribution companies.
A more digitized power system
The emergence of information and communication technologies (ICTs) is playing a big role in helping utilities fulfill energy demand, according to the study. Digitalization is also enabling networks to become more actively managed, while putting an end to a system in which networks are sized to meet the aggregate peak demand of passive consumers. Dozens of businesses, from startups to established providers, will be able to offer increased monitoring and control of power networks as a result.
The digitalization of the power sector does have its risks, though, as demonstrated by the December 2015 cyberattack on the Ukrainian power grid. This is why Utility of the Future’s authors insist protecting the nation’s electricity grid from a potential cyber-attack must remain a top priority.
“There is no ‘silver bullet’ when it comes to cybersecurity,” says Miller. “Instead, we need to develop a risk management culture and share information about cyberattacks.” Siemens takes a similar approach when addressing cybersecurity, performing an as-is analysis of a company’s infrastructure and cyber security methods. Based on this information, Siemens develops a risk management profile to assist operators in minimizing risk and enhancing resilience should an attack occur.
Financing the energy system of tomorrow
Utility of the Future makes a strong case that action is needed sooner rather than later. “The time is now to establish better incentives for electricity consumers, competitive businesses, and regulated utilities alike, and to improve regulation and market design for an evolving electricity sector,” says Miller. As part of its ongoing commitment to help make this transition as smooth as possible, Siemens partnered with MITEI to explore the important role of financing in advancing the global energy system. One manifestation of this partnership was a special event hosted at MIT in Cambridge, Massachusetts, on February 15: Financing the Energy System of Tomorrow.
The event explored regulatory, policy and market reforms designed to enable the evolution of power systems over the next decade. After a keynote by a representative from MITEI, a panel discussion focused on how flexible financing options can support future power generation infrastructure. Financing the Energy System of Tomorrow took place in conjunction with Siemens Finance Week 2017, a global series of events.
“We couldn’t have been happier with the results of this partnership,” says Edelman. “Together with the incredible minds at MIT’s Energy Initiative, we put forward a stimulating discussion on how financing can lead to a brighter future for the power sector.”
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