To help answer this question, we are running Enviro Influencers series of interviews, where we talk to key people on the front line of this disruption. Our interviewees are a diverse bunch from across the globe including consultants, regulators, academics, scientists and of course the odd ‘techie’ here and there for good measure. This one with Matt we did few weeks ago. He predicted something, and 3 weeks later there is evidence of it!
And who said economists can’t make accurate predictions?
“Regulators also want things to change.They don’t live in a cocoon. They can see the benefits of technology but they also have a duty of care to protect the public and the environment.’
A Look at the environmental & energy sector from the economist perspective:
AmbiSense: Where will technology have the greatest impact on the environmental industry and why?
Matt Georges: The area that is already being impacted and will get even more disruptive is a nexus between electric vehicles, small scale battery storage, smart metering systems and solar panels.
The disruptive impact of renewable energy is already being felt in a big way through losses experienced by the major, centralised energy players. RWE lost €6 billion in 2016 and EON lost €16 billion. They lost this money on write downs on the value of their coal & gas assets & increased nuclear costs but what that tells me is that disruption is already happening.
While the big shift in renewable energy is in off-shore wind, certainly in the UK at least, you need to be a big business to invest at that sort of scale so it’s still fundamentally a centralised energy model. However, I think in the future there will be room for domestic and small scale business producers to get into this market and take lots of market share from traditional players. We are not sure yet at all, how it will fit together and we are at early days but I can really see that business model coming together in the years to come based on the nexus I talked about earlier.
A: So it’s a move from centralised to decentralised energy?
MG: Yes. There is an interesting article by Mike Snowden who talks about the 3 Ds: Decarbonisation, decentralisation, digitisation that are changing the energy landscape. So the market will concentrate on smarter networks with more space for the kind of analytics that you guys do. There will be lots of pricing based models and in fact we are just starting to see the (re-) emergence of systems that allow electricity suppliers to remotely access the batteries in people’s electric cars .
It also brings transport into the electricity system and very soon a lot of heating will be electric. It draws our energy needs much closer together into one cohesive system. Now, when people say energy, they think electricity but they forget about the gas for their homes, the petrol for the car, the oil for various industrial systems. It’s still early days but it feels like this cohesion is starting to happen. However, it will only make a big difference when there is some sort of system aggregator who can offer the power of, say, 150,000 homes to the market.
The only problem is that we are already starting to see concerns about hacking of smart meters, smart cars and homes. There is a real danger, just as Uber is finding now, that the model is not quite sustainable as they thought and there are some holes in it! (Let’s not forget that they haven’t yet made a profit!). These types of issues might cause people to be understandably resistant to adoption of these technologies and as such require serious consideration. Nevertheless, the technology is there and the time is coming for it.
A: Over what time frame do you think this disruption will occur?
MG: If you think of the typical ‘S shaped’ innovation curve, we are still in the early stages, but that is starting to pick up now. We had recent announcements from Land Rover and Volvo about no more petrol or diesel only vehicles and that sends really strong signals to the market.
But while we are in the early days of innovation, I’m happy to give you a prediction. At the moment we have about 50 gas fired plants in the UK and I reckon in 10 years’ time the number will be down to 10, and they will only be needed as peaking plant and for balancing the grid. There will be an underlying bit of nuclear and variable renewables on top but a lot of the balancing will be done through small scale storage & aggregation. Perhaps the profitability of even these plants will come under real pressure. This in turn will have a huge disruptive impact on many of these massive companies whose businesses are built around centralised energy generation. In Germany this policy is already well advanced and is called Energiewende.
A: What kind of regulatory changes will be required as these types of technologies become more prevalent?
MG: One of the many mantras in Silicon Valley is: ‘you should seek forgiveness not permission’. That doesn’t always work in heavily regulated sectors. It’s not good to connect lots of homes with batteries, when you are using the wrong frequency for example. The National Grid simply won’t let you do it and that’s that.
Therefore in a regulated industry, the value proposition needs to be somewhat different. You need to have standards because you have all these different pieces of equipment talking to each other across the same network. But also I just wonder if this ‘move faster, break things’ attitude, like a lot of things in Silicon Valley is hyperbole. Airbnb has shaken up the hotel market but after a few years cities like Amsterdam, Barcelona & London are really starting to push back and are catching up with these companies; similar with Uber.
So it’s not a question of doing stuff and the regulations not being there, it’s a question of when the regulations will catch up with you. In the Airbnb case, it is taking a while but regulators are starting to catch up, and it will have an impact on these companies.
In regulated markets, you do end up with less innovation but you also end up with a lot more robust start-up companies than you do in other sectors. There is sometimes a lot to be said for companies having to go through necessary regulatory barriers. As an example of an unregulated market, look at something like Juicero, a company who raised $120 million before people realised that the core technology was to say the least, questionable
And the other thing is there is always pressure on regulators to move and to change and there always has been. Unfairly, in my view, people tend to think that this pressure is always external through lobbying and so on. But a lot of the time it is regulators that want things to change. They don’t live in a cocoon, they read what’s happening in the news. There are a lot of people inside regulators who are excited by innovation. They want to help to embrace technology, while also protecting people. This is what you would expect from regulators, wouldn’t you? So maybe going forward, those innovators inside regulators will perhaps get more of a hearing. So I’m relatively confident, I think the pace of regulatory change will increase, but it will never be as fast as Silicon Valley, there is no doubt about that but I think you have to be careful what you wish for. Some of the changes that unchecked innovation has, often have quite bad side effects. For example look at the impact hydraulic fracturing has had on the US. While it has undoubtedly benefited the economy in the short-term, it has come at a price. This is actually slowing down adoption of this technology in the UK where the regulator now has to be much more careful.
A: The EPA in the States have actually launched a number of internal working groups with a view to come up with next generation environmental regulations so start-ups can develop in-step with and have a signpost to where the regulations are heading. Should the Environment Agency look at something similar or maybe just wait to see what the market develops?
MG: For the Environment Agency it’s very sector dependent. There’s almost a cultural thing at play within different sectors. I work with quite a range of industries on emissions and how much it costs them to reduce emissions. There are very different cultures within sectors and even between companies. There is also a general pattern that certain sectors are much more compliant than others. Quite a few companies and sectors already seek ‘forgiveness’ not permission. For example, in the waste sector, which is particularly prone to this, there is a lot of work to try & separate out those companies which are compliant and are doing a good job by and large, from the ones for whom being described as ‘seeking forgiveness’ is a very charitable way of putting it.
And we are looking at how to dis-incentivise this way of doing things. This is really starting to happen in the water sector where there is a trend of applying enormous fines on the water companies. For example the fine of £22M on Thames Water for systemic release of raw sewage to the Thames.
Taking these types of actions sends a really strong signal to the market and consequently we hope will prevent these things from happening which of course is the ideal, most cost-effective solution.
A: Do you think technology will reshape incumbent business models or simply change the way existing services are delivered?
MG: I think it will be a bit of both. Whenever there is disruption, some players adapt and some don’t. When you think of IBM in the 1980s, they were doing so well until Microsoft came along and nearly wiped them out but IBM adapted and they are still going strong. We will definitely see those larger scale centralised generators significantly downsized, bought out or actually go bust.
But we are likely to see the rise of some new players, and the key potential area for it would be the aggregators. They would sign up a deal with hundreds of thousands of home owners so that when they have some spare electricity from their car, solar panels or batteries the company will take it, aggregate it and bid that into the market. There will be large economies of scale there and large network benefits. We might end up with a sort of ‘Facebook’ for it, where there will be one or two dominant aggregators who will own the market and offer decent prices as a result. But the question is how many more people will invest in the technology to be part of this & what will drive them to do that? Generally though, I think we will see fewer and fewer centralised business models and more and more decentralised business models.
A: What is the coolest piece of tech. you’ve come across in the last 12 months?
MG: Jaguar E type 0 with an electric engine! So I’m an environmentalist and conspicuous economic consumption is driven by insecure people and their egos and it’s one of the main reasons we are facing environmental catastrophe, but I just really want to emphasise how much I want that car! I shouldn’t really fetishise cars, as an environmentalist, but it’s environmentally friendly, quiet, high performing & high-tech. I really want one!
About Matt Georges
Matt is a principal economist at the Environment Agency, working on a wide range of projects from analysing waste crime to cost-benefit analysis in major industries, such as iron and steel, lime and cement, and oil refining. He has over 15 years’ experience in environmental policy, economics and regulation in both the public and private sectors and is a key member of the group producing the UK’s first apprenticeship for economists. He has managed the Environment Agency’s energy and climate change mitigation team and led the early development of the Agency’s approach to the shale gas sector. In his spare time he is Chair of the successful Ham Parade Market, a not-for-profit project designed to revitalise a small high street, support local charities and improve community cohesion.