Incumbent energy companies are indispensable

06-09-2019

Yesterday CEO Annie Krist spoke at the opening of the academic year of the Economics and Business Studies Faculty in Groningen. The key message was: without the established energy companies, the current energy
transition will be very difficult if not impossible

5 September 2019

Speech by Annie Krist, CEO of GasTerra, on the occasion of the opening of the academic year of the Faculty of Economics and Business at the University of Groningen.

Ladies and gentlemen,

I should like to start by thanking the university for the honour of inviting me to speak during the official opening of the academic year of the university’s Faculty of Economics and Business. This is an honour because Groningen is my alma mater, and because the opening is a high point in academic life. It is also encouraging because in the complex and turbulent transition towards a new and climate-friendly energy system I have the opportunity today to speak on behalf of the establishment. Fortunately there are still enough rational people who recognise that without that establishment the transition from an energy economy dependent on fossil sources to one that that draws sufficiently on renewable energy carriers is a lot more difficult if not impossible.

My company, GasTerra, has understood this since it was set up in 2005. And we act on this. In the past 15 years GasTerra has spent millions of euros on transition projects, research and providing information in this area. In fact, the history of our contribution to the energy transition goes back much further, to the time when Gasunie had not yet been split into a transmission company and a trading company The older members of the audience will remember when energy saving became a hot item after the first oil crisis in the 1970s. Gasunie made an active contribution by stimulating and facilitating the development of the high-efficiency boiler (de HR-ketel in Dutch). It is easy to forget that without this innovation the Dutch heating system would be much less efficient than it is today. And not many people realise that the rest of the world still has a long way to go in this regard.

Most of the tens of millions of boilers are of the old-fashioned type. Replacing them on a large scale allows a country to quickly cut its CO2 emissions by double-digit percentage figures, and the same is true of insulation measures and the replacement of coal and oil by natural gas.

This focus by a representative of the energy incumbents on reducing energy use and, in the years to come, the need to switch to a more climate-friendly energy system seems paradoxical. Why should energy companies that depend on the production, sale and distribution of fossil fuels take an active part in a policy that reduces the sales of these products?

Ladies and gentlemen, these companies do this hopefully because they want to do business in a socially responsible manner but mainly on the basis of enlightened self-interest. After all, it is clear to everyone that the best days of the current fossil energy based energy system lie behind us. The idea that we need to move towards a climate-neutral energy supply, and so away from fossil sources, as quickly as possible is disputed only by a group that, at least in Europe, is not making any significant contribution to the social debate. For my sector, this also means that the use of natural gas will eventually cease.

The fact that we will use more natural gas in the short and medium term, as in Germany but also in other countries, seems contradictory but in fact it isn’t. The energy transition is not a straight rising line but a path with many hairpin bends, bumps and gaps. But the aim is clear: zero contribution to climate change from human activity by 2050 at the latest.

In the invitation to this event you will have read that today I will be talking about how incumbent energy companies can contribute to the energy transition.

And, since the success of this is partly dependent on international market developments, how they can help prepare the way for sustainable energy sources that will eventually have to take on the entire responsibility for energy supply.

The first point I should like to make on this issue is that we have to recognise that, as I said in my introduction, they – the incumbents - are essential. It is fashionable in some circles to be very critical of large industrial energy companies like Shell, but this is counter-productive. Everyone needs to realise that the huge investments that are needed for the energy transition cannot come exclusively from innovative start-ups, companies specialising in sustainable energy or the individual taxpayer. For this, we also and perhaps primarily rely on the knowledge and resources of large oil and gas groups that, in their own interest, are going to have to spend an increasing proportion of their income on sustainable innovations and activities. They will have to adapt their strategy and earnings model accordingly. If they do not do so, their long-term continuity is at risk. But they can only do that if they also continue to invest in existing fossil energy. This is vital for the simple reason that we cannot meet the world’s growing hunger for energy from renewable energy sources alone in the first few decades. That is the real paradox, and one that we as a society must face up to for the time being.

How are the incumbents dealing with this? Four years ago a researcher, Magda Smink, wrote a thesis on this topic. One of my colleagues tracked down the text in the archives in preparation for this speech. The results of Dr. Smink’s research are still just as relevant today,  despite the passage of time.

 In her thesis she describes the enormous challenge that the energy transition represents both to business and to governments. Incumbents face an uncertain future now that society is stepping up its demands in this area. At the same time, sustainable alternatives are not yet financially viable, which means that they depend on government subsidies and consequently are not making sufficient progress to supply enough energy. Magda Smink presents the various ways in which companies are responding to this situation. Some, like Shell and Engie, are increasing their investment in green energy. Recently we have seen that others, like E.on/Uniper, have split into a ‘green’ section and a ‘fossil’ section. Others are doing nothing or limiting themselves to small-scale projects and research, such as most state-owned oil companies.

What unites all these companies is that they have to cope with what Ms. Smink calls the institutional challenge: changes in laws and regulations on numerous related issues, such as fuel quality requirements, safety standards for heating installations, and so on. She provides on the one hand various examples of how the establishment tries to maintain existing institutional arrangements or prevent change. But that is not all. She also examines the companies that are working seriously on energy transition. Ms. Smink mentions gas sector incumbents as a prime example of companies that have actively contributed to the necessary institutional change, and are continuing to do so. You should know that I am a bit proud of this. Nowadays gas companies are not exactly weighed down by the burden of the compliments they receive.

Let me give you a few other examples of our transition activities. At the start of my speech I mentioned the success of the high-efficiency boiler. We are still convinced that the energy transition is essential and must be speeded up in all our interests. We have discovered that this is not a smooth process.

I don’t know whether any of you have heard of the intended successor to the high-efficiency boiler, the high efficiency e-boiler. It is a small combined heat and power system that not only heats homes but also produces electricity. Like large combined heat and power plants, the efficiency of these boilers is astonishing, but they have not taken off commercially. The government has preferred to devote the subsidies needed for a successful market launch to energy that is almost 100% sustainable, such as wind and solar energy. Existing large CHP plants are suffering for the same reason. This is certainly undesirable from the point of view of the need to reduce CO2 emissions, but as you know nowadays anything that uses natural gas arouses suspicion in advance in our country.

Fortunately, not everything that we have done over the years in this regard has resulted in disappointment. We have been an enthusiastic participant in the Sustainable Ameland project from the beginning. The aim is to put this Wadden island 20 years ahead of the curve in the energy transition. Several initiatives have been developed as part of this project: a test ten years ago on incorporating hydrogen into the local gas network; setting up a solar field; installing fuel cells to produce electricity from green gas, and so on. In Groningen we are working with the University of Groningen and the Hanze University of Applied Sciences. We are actively involved with EnTranCe, the energy transition centre run by these two higher education institutions, and are a co-founder and co-funder of the Energy Academy, which has now become the New Energy  Coalition. We support educational activities in schools, providing literature and other resources, and, with the help of the University and Gasunie, have converted a truck into a travelling classroom in which lessons on energy are provided to secondary school pupils all over the country.

We also organise events for teachers and pupils and carry out projects aimed specifically at young people to bring home to them the importance of the energy transition and improving sustainability. And last but not least we have sponsored a number of scientific studies into the functioning of the markets and the role of natural gas and renewable gases in the energy transition.

A recent example of this is a study carried out at our request by a team at Groningen under the leadership of Professor Machiel Mulder into the commercial opportunities for sustainable hydrogen. Hydrogen is hot. It is regarded as a very promising alternative to natural gas, with a greater potential than even biomethane or green gas. This is understandable. You can make sustainable or green hydrogen from green electricity, usually generated by windmills, by means of electrolysis. Harmless water vapour is produced during incineration. And because it is a gas, it is much easier than electricity to store and transport over long distances.

But the green hydrogen race is far from over, ladies and gentlemen. Let me explain why.

If we are to make significant progress in the development of a hydrogen market in the foreseeable future, economies of scale will have to be created as a basis for the development of demand and infrastructure. An intermediate step, called blue hydrogen, is needed for this. That is hydrogen produced from a fossil feedstock, usually natural gas, whose CO2 footprint is offset by carbon capture & storage (CCS). The research carried out by Professor Mulder and his team clearly showed that it is much cheaper and easier to create volume with blue hydrogen than with green hydrogen, because blue hydrogen costs much less than green hydrogen.

According to the researchers, green hydrogen will only become more cost-effective than blue hydrogen once electricity prices are structurally lower than gas prices. I won’t bore you with figures and calculations (you can find them in the research report published on our website and that of the University), but the price levels needed for this are not likely to be seen in the foreseeable future since the price of electricity is almost always determined by the marginal costs of gas-fired power stations, and this is not likely to change soon. In addition, the Netherlands is faced with an enormous task when it comes to making electricity supply more sustainable. This leads to the pressing question of whether the additional capacity of sustainable electricity production that will come on stream in the decades to come will be used to produce green hydrogen. All in all, the development of blue hydrogen is vital to give green hydrogen the opportunity that it deserves.

I am using this example to show how important markets are to a successful energy transition. Just like, there they are again, the incumbent companies that know how to make and manage those markets. When we talk about energy transition, we often talk only of promising innovations, the use of ground-breaking technology, the installation of more, and increasingly varied, sustainable energy sources, improving energy efficiency and the costs of investment. But all these factors depend on the operation of markets. Until there is a market for hydrogen as a fuel, there is little point in talking about large-scale investments in technology and resources. Producers must have an eye to returns, and need buyers for this reason. And buyers are not at the end of a single pipeline but part of a complex system with thousands of connections. Trade in a product like this will, as is the case for natural gas, oil and other commodities, be virtual, with the product potentially changing hands several times before physically reaching the end user.

Finally I should like to raise another aspect for you to think about: energy transition and security of supply are not necessarily the best of friends. We want to achieve the goals of the Paris Agreement as quickly as possible, but at the same time ensure that enough energy is still available for our steadily growing global economy. The free markets, and so established businesses, have a major part to play in this as well. Energy carriers compete  with each other. Expensive renewables with cheap conventionals. To achieve the desired transition, governments intervene by means of taxation, subsidies and measures such as the ETS to shift the balance in favour of sustainable alternatives. These interventions must not distort competition at domestic or international level. In a national context that is no easy task, and the issue becomes even more complex on the international stage in view of the actual geopolitical situation: countries at various stages of development, divergent interests, governments with different political leanings, systems and differing views on climate change and the action that needs to be taken. And we must not forget that climate change and energy supply are not the only problems facing humanity. Anyone who spends all their time in the energy and climate bubble is at risk of forgetting that. Education, healthcare, immigration, housing, employment and so on are vital and expensive. This means that we have to make choices: often painful choices that require compromise on all sides. Anyone who thinks that this doesn’t have to apply to climate change in the belief that it is the “mother of all problems” and therefore a robust climate policy is the quickest route to a better world has a clear philosophy but at the same time perhaps little sense of reality.

I will now draw to a close. The core of my speech today was a twofold message about incumbent energy firms. Firstly for society: they are vital to a fast and successful transition to a climate-neutral energy supply, but will nevertheless have to continue to draw on fossil sources for a long time to come. Secondly for the firms themselves: the fact that they are essential brings hard duties and also opportunities with it. The duty is to make improving sustainability a central part of corporate strategy. And the opportunities relate to new earnings models, which will probably not in the short term deliver the high returns of yesteryear but which may secure long-term continuity.

There is still a world to be won on this point.

Thank you.