‘Globalization’ has been beyond doubt the key issue of human development since 1990s. Broadly speaking, globalization refers to a social process formed by the flow of elements including goods, capital, and even cultural concepts and consciousness. Among those, the transactional flow of goods and capital is the very initial form.
The globalization within the energy sector has been rooted in the transnational trade of coal and oil for more than 100 years. After years of accumulated development, globalization of energy has gradually been upgraded by the transaction of traditional resources. For one thing, the assets traded move from coal and oil to more diversified categories, such as natural gas and electricity. For another thing, trading model extends from goods transaction to cross-border investment, construction and technical cooperation, and financial products such as spot, futures and option settlement are derived. As the energy globalization boils the ocean, clean energy will further become the core issue. It is estimated that clean energy will account for more than 80% of global primary energy consumption in 2050. However, constrained by the geographically uneven distribution of resources, it is necessary to establish an interconnected system to facilitate energy circulation. And electricity, as the eventual media of energy flows, is to become the core component of the entire energy sector.
During the globalization of energy sector, the expansion of capital and technology is witnessed with the increasing scale of cross-border energy investment and construction. In the meanwhile, Chinese energy companies are indispensable facilitators – In 2017, Chinese overseas investment in power and utility sector has reached $62.53 billion, most of which flowed to Europe, America and Africa.
Although Chinese companies' outward investment in power has slowed down in recent years, this will not lead to their depressed performance. On the contrary, it may bring on a new era of technology export after years of capital export. Accenture believes that the global energy market is currently going through deep transition and fast innovation, grasping the trends will help to better cope with the upcoming opportunities and challenges.
Increasing Integration of Global Grids
With the uneven distribution of natural resources and the distinct demand of power, many countries are suffering from the power imbalance, no matter geographically or quantitatively, and the connection of global grids becomes an essential measure to address the issue.
At the present, the capacity of global interconnected grid is approximately 250GW, expected to grow at a rate of nearly 10%. Rapidly expanding, it is now forming five major intercontinental grids, namely North America, South America, Pan-Europe, Africa and Asia interconnected grids, with each in various developing phases.
The Pan-European interconnected grid is currently the largest, most mature and most dense one among the world, with the total length of cables above 110kV reaching 487.1 thousand kilometers. Possessing 423 multinational cables, the annual cross-border power exchange volume grows up to 467TWh, while intracontinental volume accounts for 93%. The complexity of grid distribution and power absorption demands the Pan-European interconnected grid to maintain stable and efficient operation while being flexibly and densely distributed. Accordingly, to ensure smooth power circulation and consumption between the countries, it is expected that 201 new overhead cables, 67 submarine cables and 23 underground cables, as well as 15 energy storage power stations and other supporting facilities will be built during 2018-2030, with a total investment of 114 billion euros.
So far, Chinese power companies have participated more in the power markets of Southeast Asia, South Asia, Africa and other immature regions that are different from Europe area. These areas, due to the relatively backward economy, have not yet formed stable intracontinental or multinational grid systems, remaining a great potential for grid improvements.
Africa, for example, can be divided into three major regions: Northern Africa, Central Africa and Southern Africa. Among them, the Southern and Northern part are the ones that are comparatively developed and have larger electricity demands. While Northern Africa possesses sufficient Wind and Solar resources, with the technical potential of Solar energy mounted up to 1200 GW and accounting for 42% of the whole continent’s solar energy potential, Southern Africa is relatively short of renewable resources. In this context, it can be expected that in the future there will be frequent power transmissions from Central Africa to Northern and Southern Africa and power exchanges between Northern Africa and Eurasia. In addition to the North-South cross-border cables, construction of transmission lines from Central Africa to Western and Eastern Africa will also be driven by the power demand gap in Western area and the rich hydropower resources in Eastern area. It is planned that, from now to 2050, the incremental grid capacity in Africa will be as high as 460GW and the total investment will be $1.32 trillion, of which Northern Africa, Southern Africa and Western Africa account for ¼ respectively, and Central Africa and East Africa account for total 25%.
Regardless of the extent of development, there exist demands for new construction, renovation and interconnection of grids in all countries and it is unstoppable that the power grids are interconnecting and integrating globally. Meanwhile, emerging concepts such as submarine cables and smart grids are also expanding rapidly. And the larger the scale of renewables, the higher the requirements for transmission capacity, long-distance transmission technologies and grid absorptive capability are. Therefore, there is still a huge market for global grid integration to be exploited.
But more importantly, the grids and power plants are inseparably connected – the integration of power grids enables countries to better utilize their own resources without the geographical restrictions.
Diversifying Global Electricity Source
In general, Wind, Solar, Biomass, Geothermal and other emerging unconventional energies are called New Energy. The interconnection of power grids not only provides a great opportunity for New Energy to expand, but also supports the exploration of emerging New Energy Technology, as New Energy resources are usually not distributed in densely-populated areas such as the Western area in our nation and the Sahara Dessert in Africa.
Overall, a total 2581 TWh New Energy power generation accounts for 10.1% of global generation, 5.6% of which is Wind energy and 1.9% of which is Solar energy. Clearly, Wind and Solar energy are technically the most mature New Energy sources – the LCOE of Onshore Wind power and Solar power is decreasing dramatically over the years, with the estimation that LCOE of Offshore Wind power and Photothermal power are also coming down.
However, this is not the whole picture of New Energy Technology. On the one hand, there are multiple ways to utilize same kind of resources. For example, besides the well-known types of Ocean Energy including Wave Energy, Tidal Energy, Marine Energy, Osmotic Energy and Ocean Thermal Energy are emerging as alternative ways to generate electricity; as for technology in Geothermal Energy, there also are diverse technologies including Geothermal Steam power generation, binary cycle power generation, total flowing power generation. On the other hand, the development of Biomass is still in the early stage, leaving a great potential to be exploited. Apart from waste incineration and Agriculture waste incineration, Renewable Natural Gases (RNG, also called Biogas) is expected to play an important role in Biomass Energy.
Formed in the anaerobic fermentation of Solid Manure, Liquid Manure, Crop Straw, Organic Waste, Bioenergy Crop, or Mud, RNG is a purified green, low-carbon renewable gas. Compared to other New Energy sources, RNG has a significant advantage in production cost. For instance, in the United Kingdom, the generation cost of RNG is €0.076 – €0.0995/kWh (approximately $0.086 – $0.11/kWh), of which Biogas production and purification are the main components, each accounting for about 1/3 of the total cost. Lower production cost and rich resource make RNG a highly competitive source of energy. In September 2018, the National Energy Administration of China issued an announcement encouraging demonstration projects of RNG and aiming to establish regulatory support and management system, to construct leading commercial projects, and to initially form RNG’ circular economy format. It is estimated that several countries with huge electricity demand including China will embrace the new era of RNG.
In future, there is a huge development potential for Renewable energy, however, the future market is not limited in Wind, Solar and Biomass generation. Diversified technologies in New Energy are the main drivers to lead Global Electricity market to transfer together with business model to reform.
Derivate Global Electricity Trading Mode
Compared with coal and natural gas generation, Renewables are generally of higher cost. As a result, Feed-in-Tariff (FiT) became a vital motivation of the development of Renewables. Yet, along with the emerging new technology and the changing market environment, incentives for the supply-side are becoming increasingly diversified and the reforming power systems are causing more complicated trading system for mainstream and downstream companies.
As for generation companies, governments have begun to explore mechanisms such as capacity auction, Contract for Difference(CfD) and tax investor mechanism. Western European countries, especially UK, are the pioneers in this area. Taking CfD as an example, which is used in UK and defines the exercise price, when the market price exceeds the exercise price, the power companies will need to pay the spread and vice versa, ensuring the long-term and efficient support to the market participants.
More and more countries are opening electricity wholesale and even retail market, building centralized electricity trading market and discovering new type of trading mechanism. Following this trend, more diversified types of entities participates in the electricity trading market, including large industrial enterprises, financial institution and other investment companies.
Although the rapidly changing market brings the opportunities of ‘Going Global’ for Chinese power companies, the increasingly complex environment of market results in more intense competition.
In the future, Chinese power enterprises will stand in front of the opportunities and challenges caused by plenty of changes such as change in demand, technological innovation, institution change, policy constraints and multivariate competition. To help Chinese power companies have better understanding of the dynamics of global power industry and take advantages of their strengths, please stay tuned with Accenture’s following series of articles.