Three steps to make energy fit for the 21st century

The majority of energy systems today are built for the 20^th century: they are based on large, centralized, generational capacity linked into complex distribution networks and industrial and consumer bases, and work “from the centre to the edge”. What we are witnessing now is the emergence of energy systems where the “edge” is producing energy in its own right, through the deployment of micro-grids at the village level and the ability of households and individuals to produce electricity locally. At some point, this new edge-to-centre grid will intersect with the main grid, and this is one of the main features of 21^st-century energy systems.

Technological innovation will have a central role in building this new energy architecture. Governments increasingly recognize the opportunities that these new energy systems present and the myriad ways in which they can develop. And digital technologies – in particular, the industrial internet – will be key enablers of this transition to new ways of producing, distributing and consuming energy. By supporting more sophisticated demand-management capabilities across the energy system – through intelligent wells, oilfields, pipelines and terminals, as well as smart grids – the industrial internet can facilitate access to energy that is at the same time affordable, sustainable and secure.

The reality is that in many countries, access to energy is still limited, and this stymies economic growth. In the new world, demand-generation capabilities enable the energy system to intelligently manage limited energy sources in ways that cater for more individuals and more businesses, using energy for wealth-generating activities, thereby contributing to broader economic development. This also serves to limit the use of subsidies and the impact this “anchor” has on economies. In our recently released Global Energy Architecture Performance Index Report 2015, produced in collaboration with the World Economic Forum, we use the example of Indonesia to illustrate the corrosive effect of subsidies, which represented 18.8% of government spend in 2013 – the near equivalent of the UK government’s total public spending on the National Health Service in 2013-2014 (18.1%).

This new energy system represents huge opportunities for industry and governments – particularly in emerging markets where the grid is not yet fully developed. To fully maximize these opportunities, energy leaders need to recognize the requirements of today’s energy system and take three key actions.

First, encourage diverse portfolios of energy supply by laying down the regulatory frameworks fit for this new energy system; second, invest in upskilling workforces to match new talent requirements; and finally, encourage energy consumers to become active participants in the new system. These are some of the themes that we develop further in our report, which examines the topic of energy reforms in major emerging economies.

Few would argue that the 21^st-century energy system must be an “and” system, defined by a diverse energy mix that includes oil, gas and coal, as well as renewables and energy-efficiency measures – rather than a “one” system focused on fewer sources of energy. Energy reforms should encourage these wide portfolios of energy sources, as well as more decentralized and democratic ways of distributing energy than we see in the traditional system today. Governments need to recognize this transition to the new system and lay down the policies required to allow the energy architecture to emerge.

Too often, existing regulatory and institutional frameworks are built on a historical view of the energy system. This needs to change. Energy reforms should reflect the wider transition underway, by driving the right policy agendas forward. More thinking is required on how to integrate the “edge” grid into the existing centre; these challenges are already surfacing in Germany in the context of its Energiewende.

Ambitious technology agendas go hand-in-hand with the upskilling of workforces. Skills in information and communications technology (ICT), data and engineering will play a critical role in the emergence of the new energy system. Governments should start building the workforce of the future by supporting the development of this talent pool through the right education policies and adequate levels of funding for relevant curricula.

Finally, the energy system of the 21^st century is much more segmented and multifaceted. The opposite of a monopoly, it is made up of multiple parts – with different organizations controlling different components of the value chain. Governments need to recognize this evolution and encourage the entrepreneurial spirit intrinsic to it, by encouraging the public – both at the community and individual levels – to become active participants in the new system and contribute to its success.

The energy industry will be at the forefront of this technological transformation of the energy system through the industrial internet. By providing the right signals, governments can prove that they understand the playing field. Industry players can then invest their know-how and research-and-development resources in response to these changes. Any lack of certainty from governments will only slow down growth.

Has the energy sector adapted to the 21^st century yet? Not quite. But there are huge opportunities for governments willing to help it do so, by encouraging diverse energy portfolios, the right regulatory structures, the upskilling of the workforce and wider participation from the public.

The Global Energy Architecture Performance Index 2015 was published this week.

Author: Arthur Hanna, Senior Managing Director, Accenture Strategy, Energy.

Image: The sun rises behind windmills at a wind farm in Palm Springs, California, February 9, 2011. REUTERS/Lucy Nicholson