Centrica : The future of energy

Good morning ladies and gentlemen.

Thank you for the opportunity to address the future of energy in 2030 and beyond… and in about 15 minutes!

Predicting the future is a treacherous business, not least because the rate of change within our lifetimes has been so considerable.

In 1962, in his famous 'moon speech', John F Kennedy condensed the span of human history to fifty years.

By that measure, we emerged from the caves ten years ago, invented the lightbulb last week, and nuclear power yesterday.

And things have sped up immeasurably since.

There are two moments in the early 1990s that we will look back on as notable triggers of that.

First, the invention of the world wide web, 30 years ago this month, which has already radically changed our world.

Second, the Rio Earth Summit in 1992 and the signing of the UN Framework Convention on Climate Change: a moment that will change our future just as profoundly.

It may be perilous to attempt to predict the future of energy, but let me give my whistle-stop view of that future and what we need to do to shape it, as businesses in this sector, as developed nations, and within the emerging economies.

THE THREE TRENDS WE CAN PREDICT

The context, of course, is decarbonisation, which is driving the choices we need to make.

As the IPCC tells us, we are now tracking far above the acceptable limits for global warming.

They estimate we are now on track for 3.1 to 3.5 degrees above pre-industrial levels, a sobering fact that puts the debate around targets of 1.5 or 2 degrees in the shade. And we must not forget about the other impact of climate change - the acidification of the oceans.

But we have made progress.

Since Rio, I see three distinct phases:

First, from 1995-2005 there was a decade of visioning, in which we sought to understand the scale of the problem, and what we must do about it.

Second, between 2005 and 2015, there was a decade of experimentation in which we tested various approaches to combat climate change.

Now we are in the third phase, the decade from 2015: a decade of pragmatic action.

If we don't deploy solutions at scale within this decade, we will diminish our chance of limiting further rises in average temperatures.

We are seeing a gradual building of momentum:

The UK and 18 other economies have signed up to net-zero emissions by 2050.

And there has been considerable improvement in the economics of clean energy: since 2010, the cost of wind and solar generation has fallen by 30 and 80 percent respectively.

This combination of cheaper clean energy and government action is taking effect: between 2000 and 2016, electricity generation from renewable sources more than doubled globally, and an increasing amount is not grid connected.

Two years ago, I stood here and highlighted three trends that would shape the future of this sector. In the context of the race to decarbonise, these trends have only accelerated.

First, I spoke about decentralisation of the energy system.

As the cost of generating clean power falls, as the availability of new technology grows, and as customers become more aware of their energy use and wish to control it, this decentralisation accelerates.

In the UK, 19% of power generation is now distributed.

Globally, the rapid growth in energy from distributed sources continues.

Distributed generation will increase from about 2% in 2015 to 12% of all power generation by 2030, representing over half the growth.

Much more generation and optimisation now occurs 'at the edge' of the energy system.

This has driven the second trend I discussed two years ago: the shift of power and influence to the customer.

As customers become increasingly determined to control and optimise their energy use and able to do so, they are becoming more powerful. The rent therefore moves to the interface with the customer.

The final trend I talked about two years ago was the digitalisation of the sector, which is accelerating everything and spawning new customer experiences, propositions and business models. Again, this has since been defined by its acceleration.

The universe of products and propositions companies offer their customers has been transformed.

We have seen a rapid expansion of online tools, automated switching, insight from smart meters, and the ability to remotely control and manage the energy systems installed in homes and businesses.

Digitalisation is allowing our sector to transform from one that provides simple undifferentiated products, to one that provides sophisticated propositions and services.

The old regulatory environment and legacy market designs will have to change and there will be difficult decisions for policymakers, but the change is coming.

The question now is where will these trends lead?

I think there are two paths that lead to profoundly different futures.

On the one hand, there is a path that leads us to a net-zero emissions economy and the promise of the Paris accord.

We harness the growth in renewables and decentralised energy systems, drive energy efficiency as hard as possible, find a solution to the rise of unabated coal-fired power, address the hard-to-abate sectors, and find ways to decarbonise heating and cooling. And we accelerate all of this through harnessing digitalisation.

This is the harder path, the path that requires active engagement from all parties.

Because there is also a passive path: the path where we celebrate the relative progress of incremental improvements, avoid the most politically challenging issues, and allow change to happen to us, rather than shape it ourselves.

With this path we continue on our current trajectory, to 3.5 degrees of global warming or more, with the resulting devastation that recent reports, such as the IPCC's, have illustrated.

We have a choice about which path we follow.

Those of us privileged to be in positions where we can play a significant part, whether in business, government or civil society, must decide.

CENTRICA AND THE SECTOR AND THE FUTURE OF ENERGY

Let me address what we are doing in Centrica.

We have set ourselves the challenge of enabling all our customers to use energy more sustainably, set against targets leading to 2030 which are aligned to the objectives of the Paris Accord.

We believe there are three ways we can do this:

First, by helping our customers reduce their emissions;

Second, by playing our role in enabling a decarbonised energy system;

And third, by reducing our own emissions as a business.

To be in line with Paris, our customers need to reduce their total emissions by 15% by 2022 and 25% by 2030.

From our propositions and services, we aim to directly deliver 2 and 3 percentage points of these reductions respectively, and beyond this indirectly contribute to customer behaviour, technology development and policy changes to contribute to the remainder.

We have created new, lower-carbon propositions for consumers that allow them to reduce their carbon footprint including through HIVE, smart meters and self-diagnosing boilers.

Centrica Business Solutions has created an Integrated Solutions Platform which brings together the capabilities which help business customers with their energy usage, operational efficiency, demand management, demand response and optimisation, and operations and maintenance services - all through a single user interface.

To enable a decarbonised system, we are altering our portfolio, reducing our exposure to exploration and production and to gas-fired central generation, and shifting resource to market enabling technologies such as blockchain, and rapid response technologies to assist with grid optimisation.

An example of this is our Roosecote site in Cumbria, where Centrica recently completed construction of one of the largest frequency response batteries in Europe, at 49MW. This site has been at the forefront of new energy technology for over sixty years - originally home to a coal-fired power station, which was later replaced by the country's first combined cycle gas turbine, and now is at the forefront of in-front of the meter battery technology.

And we have dramatically reduced our own emissions, which are 80% lower today than a decade ago, and we aim to reduce our internal carbon footprint by another 35% by 2025.

Crucially, we do not do this alone: we seek partners and allies in this cause, for instance working with the Climate Action 100+ investors initiative during the last year.

In short, we are harnessing the trends I mentioned: decentralisation and decarbonisation of the energy system; providing more choice and control to the customer; and accelerating all of this through the digital revolution.

THE UK, THE DEVELOPED COUNTRIES, AND THE FUTURE OF ENERGY

Businesses can and must be great engines of change in shaping the future of energy, but they cannot do it alone.

The governments of the developed nations have a huge part to play, not least as they are the nations whose historical growth and economic might has been built on fossil fuels.

For these economies, whose economic growth rates from here are relatively modest, attaining clean growth is possible. This has been embraced as part of the UK Government's industrial strategy, which is an example of the type of leadership required.

In the UK, our emissions are 43% lower than in 1990.

We should be proud of what we have achieved, but the UK is clearly not the issue globally.

In the US, where there are Federal challenges to clean energy with the abandonment of the Paris Accord, encouragingly we see States and cities standing by their commitments.

In the UK and the US, we have already reaped the rewards of fossil fuels: the huge growth that our economies experienced in the previous century and before.

However, the challenge that the emerging economies face is much harder, and it is the interaction between developed and emerging economies where the real breakthrough must come.

THE EMERGING ECONOMIES

In the OECD, we have significantly decoupled energy use from economic growth, with energy use per unit of GDP falling dramatically between 1980 and today.

In emerging economies, the challenges are different.

In order to lift billions out of poverty and give so many the most fundamental access to energy, in Asia but increasingly in Africa too, their energy use will have to grow dramatically.

There are positive steps here: China and India signing the Paris Agreement was a crucial indication of their awareness of the scale of the problem and their desire to tackle it.

But the data are not positive.

China and India are estimated to be 44% of global GDP by 2060. Over the last 10 years, China's emissions have grown by 2.5% per year to 27% of global emissions; India's have grown 5.6% per year to 7% of global emissions, and global emissions reached a record high in 2018.

India and China between them are building a new coal-fired power plant each week, and although they are committing to more use of natural gas, this change to a cleaner option will not be quick.

Furthermore, it is economically less painful for us in the US and Europe to retire 30-40 year-old coal plants which have been fully depreciated. And if or when this happens, who is going to pay for the early retirement of a young coal plant in an emerging economy? It is just one of the many big questions to be answered if we are to decarbonise growth in the emerging economies.

THE GREAT CHALLENGES WE FACE

While there has been material progress and there are reasons to be positive, as we think about the future of energy there remain many great questions to be addressed.

In addition to my role at Centrica, I am Co-Chair of the World Economic Forum's System Initiative on the Future of Energy, alongside Fatih Birol, Executive Director of the IEA.

This System Initiative aims to do three things: describe the future destination of the energy system; identify the transitional imperatives and key enablers and ensure we learn from what works and what doesn't; and understand the human impact of the change.

I would like to offer some personal reflections on the global challenges from this perspective.

Firstly, we recognise that communication is crucial. We need to ensure successive governments do not reinvent the wheel and draw on learnings from elsewhere.

Secondly, we must embrace and acknowledge the tension between developed and emerging economies, and find an economic way to finance curtailment of the use of coal in power generation.

Thirdly, in all economies we must turn our attention to decarbonising heating and cooling. We have done a lot on decarbonising power generation, but heating and cooling will be key. This may seem surprising coming from someone who is responsible for British Gas, but it must be confronted.

Fourthly, we must address the hard to abate sectors such as cement, steel production, refining and petrochemicals. These will require carbon offsets and we need to consider the role of natural carbon sinks at scale and carbon capture and sequestration.

Finally, I believe cities will become increasingly important, as material integrators of pragmatic solutions supported by empowered coalitions.

GREAT CHALLENGES THAT REQUIRE ALL OF HUMANITY'S INGENUITY

I began this talk referring to Kennedy's 'moon speech', delivered in Houston, Texas in 1962. In that speech, Kennedy committed America to putting a man on the moon within the decade, which of course they did.

It was perhaps the ultimate illustration of the ingenuity of humanity.

I look at a 'net-zero' future for energy similarly.

There are great questions that remain unanswered about how we will respond to this call, just as there were then.

There are huge developments and improvements in our scientific ability now, just as there were then.

But if we direct our efforts in the same way now that we did in reaching the moon then, I believe we have reason to be optimistic.

Before I can truly become an optimist, we need to find solutions to the big challenges I outlined.

We must be ambitious but pragmatic.

We must be willing to ask and answer the difficult questions, and embrace the needs of developed and emerging economies alike.

We must be willing to accept the scale of the challenge, and find ways to pay for it.

And we must be willing to accept the role we can all play.

Society is demanding it of us, especially those of us who can play a part in influencing the outcome.

The future of energy, and the sustainability of the planet, is in our hands.

To borrow Kennedy's words, it will be 'the most hazardous and dangerous and greatest adventure on which man has ever embarked.'