Utilities will struggle to fund energy policy objectives – World Economic Forum

Declining returns for utilities means enablers are necessary to find $7.6tn needed by 2040 to upgrade energy system

The ability for the electricity sector in OECD markets to raise the funding necessary to meet energy policy objectives is at risk, according to a report from the World Economic Forum.

The report, The Future of Electricity, states that diminishing financial returns for utilities means that it is more difficult than ever for them to find the $7.6tn needed by 2040 to decarbonise the electricity system and maintain energy security. The report was released as part of a broader Future of Electricity initiative from the forum lunched at its annual meeting in Davos.

According to the report, there are five root causes of the sector's investment challenges: 

• first, Europe’s renewables are suboptimally deployed. The EU could have saved up to $140bn if renewable energy technologies were optimised within and across borders – for example placing more solar in southern Europe and more wind turbines in the windy north;
• second, a future decarbonised electricity system is currently not adequately valued by society;
• third, the European Emissions Trading Scheme does not send strong enough a price signal to decarbonise;
• fourth, traditional generation assets are subject to declining returns. Falling demand, overcapacity, reduced load factors and wholesale price declines means a loss in value of generation assets; and
• finally, the traditional utility business model is being disrupted by technological innovation and customer trends at the end of the value chain, creating opportunities for new entrants and incumbent utilities, says the report.

The report recommends actions to address these issues. It says that policymakers should plot efficient pathways to policy objectives by incentivising investment in a cross-border effective renewables system; that regulators should reward system reliability and flexibility through network tariffs; and that businesses should develop complementary customer-centric business models, using customer data from smart grids and connected devices. 

‘Since 2000, OECD countries have invested more than $3tn in new renewables, conventional power plants and distribution structure, but about 20% more investment a year is still required over the next 15 years,’ said Roberto Bocca, Head of Energy Industries at the World Economic Forum. ‘Collaboration across stakeholders will be critical to achieving this goal and providing the holistic perspective needed to successfully make the low carbon transition.’