To go Carbon Neutral, Electrify (All Of) It

BENF Go, or for free at eaton dot com. That's E A T O N dot com. Please note that BENIF does not provide investment or strategy advice, and you can hear a full disclaimer at the end of the show. I'm Mark Taylor here with Dana Perkins, and you're listening to switch it on to BENIF podcast. Hi, Vicki, Hi Albert, Thank you for joining us today. Hi Danna's Pleasures be on. Thank you for having us so we are here to

talk about sector coupling. And I must say, for the listeners, I was very lucky I got to actually attend the event where we unveiled the report that we're talking about today, and it was a pretty fun event because actually it took place on Valentine's Day and it was a sector coupling event, so there were a lot of amazing jokes

to be made about coupling. But really, let's talk about this a little bit more, because sector coupling doesn't naturally intuitively make sense as a title until you explain to

us what it actually means. Set a coupling look at a confusing term, but it's a term that's well understood now, I think in the European energy industry at least, sometimes it's called sector integration, and really it's about greater integration, greater interaction between the power and gas systems and also the three demand side sectors that we covered in the report, and that's transport, buildings, and industry. So it's really about how those five sectors are going to be more interconnected

in the future and how that contrived dcobonization. One of the guests on the panel, his name was Lord Turner, and he's actually Chair of the Energy Transitions Commission, and one of the things that he brought up during the event was that really it's about electrification, so why are people generally calling its sector coupling rather than just electrification. Well, electrification is a large part of sector coupling. It was

the focus of our study. We looked at both direct electrication, which is plugging things into the grid, so like electric vehicles or he pumps, but also indirect electrification, which is electrolysis powered by renewable energy which makes it green hydrogen. So electrification it's a large part. But there are other aspects of sector coupling as well, And I think it would be remiss for us to get too deep into this discussion before we acknowledged the fact that we did

not go it alone. We did this with Statcraft and Eaten. So why were they such good partners for us to well, one might say, couple with in order to write this report. I can't believe you went there. As you know, most of our work it goes behind the b n F pay wall. Once in a while when one of our clients has a really bright idea about something that we should spend time on together and put out into the public domain. Um, you know, the conversations get going. And

that's exactly what happened here. They already came to us and said well, in Europe, everyone's talking about sector coupling. Everyone's talking about how do you get to net zero? By what's the role that the power and gas sectors have to play in that? Can we explore that together? We wanted to do three things with it. One was to map out a plausible pathway for coupling, out what

that would mean for the power sector. And then the third part of it was really from a policy perspective, what are the considerations what should policy make has been thinking about? Let's start with point one, because that's where I get really excited about this topic, because really you're sitting there thinking, Okay, well, why should I care? I mean,

maybe everything will just run more efficiently. But if things run more efficiently and they lead to fewer emissions, this has a huge benefit for I guess life on Earth. So net zero by in we're talking about Europe here, correct, The study itself is about Europe, but we focused on a country like the UK or Germany, which we call

the Northern European archetype. And one of the really good things about sector coupling is that it makes use of the decarbonization progress that's been made in the power sector already so it takes that progress and then uses it for other sectors like transport or buildings which are reliant

on fossil fuels at the moment. We found with this plausible pathway that Albert mentioned that if applied, it could lead to a sixty reduction in greenhouse gas emissions across these three big sectors industry, buildings, and transport, by which make up roughly what percentage of the emissions pie that's roughly about okay, so six of a pretty gigantic chunk

we're looking at here. Who are the winner and all of this are their new industries popping up in new companies that are going to benefit or is this all pain for the emissions gain? I think we're talking about a massive industrial shift. So transport is road transport, it's aviation, it's marine. You're talking about a pretty much complete switchover

to electric vehicles on the road, and buildings. In our pathway, we envision pretty much complete switch over from phospipl fuel based heating to either electrification via heat pumps or two clean gases. So there's a major shift in terms of the equipment that you're going to go into buildings. Same thing in terms of industry, whether it's sort of steal cement, methanol, chemicals and so on, really big changes, So there are

going to be opportunities. We try to only include technologies that are going to have a fighting chance of being competitive between Some of them are competitive, like we see evs being competitive very soon. That's probably the nearest in terms of transitions out out of all the technologies we looked at in the study. So it's not just about pain, it's about opportunity. If these technologies are approaching competitiveness, that

creates an industrial opportunity. Well so should we taught next maybe a little bit about some of the policy and mechanisms that are going to need to be in place in order for some of these areas to take off, because some of them are already well on their way. So electric vehicles, as we've discussed, seemed to have quite a bit of momentum no pun intended at this point

in time. But there are other areas where mainly I'm actually immediately thinking about heat pumps that might need a little bit more incentive in order to get things where

they need to be. Yes, exactly, So for our plausible pathway, we had to make some assumptions of policies that would be necessary to kick start the shift away from fossil fuels, and so for certain types of buildings we assumed that there was bands on connections to the gas grid, which has taken place in the Netherlands for example, absolutely, and it's being envisaged in this country and in Germany as well,

this country being the UK apologies yes. And also in the industry side, we assumed that because at the moment, industry is one of the sectors that's made the lead to progress towards de carbonization because of this concern about carbon leakage. So that's the concern that companies will move to jurisdictions that have less ownerous carbon regulations so they therefore have easier time, for example in the EU emissions

trading scheme. But for our pathway for this report, we assume that governments would have to implement policies to ensure the industry at least make some effort towards decarbonizing and moving away from fossil fuels. Which ones maybe have more potential to decarbonized sooner, it's an interesting question. So in some of these industries like iron and steel, cement, they

have big assets with very long lives. So even if we're talking about a shift that needs to happen by twenty fifty, they need to be planning it now and they would need government support to push it through. Whereas in some of the industries that don't lie on such high temperatures like food and drink, pop and paper, they may be able to make more progress sooner. I would also say in terms of urgency, seems a long way away. The European Commission is thinking about sector integration and strategies

right now. The direct electrification technologies that we've covered, whether it's EVS or heat pumps as such, bottom up, plug and play technologies. They don't require system change on an individual basis. You can start to install these technologies as long as the incentives are in place. Well, you have to have a longer horizon. Is some of the pathways that involve power to gas, where you're talking about more of a system change. You're talking about creating green molecules.

You're talking about transporting those green molecules, storing them, changing out the equipment of the demand side to use those green molecules. And I think there's a wide recognition not only in Europe but elsewhere that if we want to be serious about that move in Theties, we've got to start thinking about it now and scaling it up and doing part of projects today. So I think that's where the discussion really is at the moment. These are major

infrastructure projects. But would you say that there is a large gap between where we are and where we need to be from a technological standpoint or is it really just around technologies exist, but the economics aren't. Fully they're so the government incentives would need to support that in order to speed that time horizon. Is it fall into a little bit of both or one of the two.

In large part of the technologies have already been developed, it's more a question of scaling up commercialization and bring down the costs. Okay, So hydrogen is a prime example of this, and some of these pathways are geographically constrained. If you want to have a hydrogen based gas grid,

it's likely to happen at a local level. What we're talking about is clusters of places that integrate all these technologies, and so while the individual technologies may exist, what we need now is to prove out the clusters that you can combine and couple these technologies in one place the title It's a gift that keeps on giving. So let's

talk a little bit more about the power system. One of the things that you guys were looking at in this report and trying to get a little bit deeper on is what all of these changes could actually mean on that side. So right now we have gas feeding in, we have power, you have electricity demand, You have a variety of different things, and all of those balances would share. Left can we make that shift fairly quickly? And what parts would need to fundamentally change in order to make

sector coupling and this potential in emissions a reality. So sector coupling would indeed have an enormous impact on the power system. For one thing, the power system would need to be much bigger because we would expect electricity demand to increase far faster and higher than it would without sector coupling. The plausible pathway that we mentioned earlier, for example, would mean that power demand would nearly double by fifty

compared with a scenario without sector coupling. So that would mean about three quarters of amount of extra generating capacity would be needed to meet that demand. And in our low cost analysis. Much of that demanan we met by wind and solar farms. It's also not out of line with what we've seen over the last three decades of power system growth in the EU and looking forward the next three decades, it's about the same. But that makes

it sound easy, it's not. I think one of the key issues is how do you increase electricity transmission capacity, particularly since we already see challenges in places like Germany where people just don't want these things to be built

through land that they own, for example. That's really one of the key challenges we highlight in the report that we sort of throw at the door of policy makers is to say, if you're serious about sector coupling or sector integration, what are you going to do about networks? How are we going to get the electricity networks built to what extent can we rely on gas networks as well? To move green molecules instead of green electrons as well?

Because there is already an increase in electricity demand even without this push is they're not well. I think in a country like the UK and Germany, power demand growth has really leveled off due to things like energy efficiency. But while what outbuts says is correct in terms of it could be a similar rate if it was like a smooth trend upwards. But the problem is we don't

expect it to necessarily be a smooth trend upwards. For example, it could be much steeper in the latter half of the period when you start to see some sectors in the industry switching to electricity. Also, it could be lumpy in terms of across the grid, so where the increase in power demand across say the whole transmission grid could be exper sent at very local levels where you might have suddenly have an entire street in stores, electric vehicles

and heat pumps. It could be much higher. And there is a lack of data visibility and communication between all the grid operators and the consumers and drivers of electric vehicles and the automakers as to who is installing these electrifification technologies, so it makes it very difficult to predict. That leads onto another key element of the report, which was looking at this issue of flexibility. Now we know that flexibility becomes important in a high renewable power system,

whether or not you have sector coupling. Once you add in high electrification of the economy, you are in a situation where you're potentially massively increasing, for example, your winter evening peak. We did a partial analysis looking at EV's and buildings I think it's just residential buildings actually, and we found that your winter evening peak could be fifty bigger on a typical winter's night if you can't flex

those loads. Whereas if you have smart EV charging and you have a reasonably well insulated building stocks, so you can preheat your homes before you get home, for example, a couple of hours before, and you can start to shave that peak pretty significantly. And that's not only so that you can run less power generation. It means you

can have a smaller grid. It also means you have lower emissions because if you're moving that load to some other part of the day, you're likely to be able to use more renewables versus that winter evening peak when you're probably using fossil fuels to meet that load, So that the importance of demand side flexibility with such coupling is even greater than what we already thought with a higher renewables power system. Well, so this is great because

this leads us directly into consumer uptake. I think, and really you, me, everybody who's listening, and how we interact in the real world. And I'm gonna admit that I've come to this with a real life example that I am currently struggling with. So I need a new water boiler, and I must tell you taking a hot shower is one of my favorite things in the world, but it comes with the guilt of knowing that I am burning all of that gas to get myself some hot water.

So if I could just have an electric water boiler that would then enable me to have a guilt free, warm hot shower, that would be amazing. Yet in the UK, so one of the countries that we're talking about as an example here, I am having trouble finding a plumber that can install heat pump or that will even tell

me that they're reliable. So can we talk a little bit about some of this gap that exists and maybe where we might beyond the typical policy mechanisms that we're talking about, where you have regulations and then other financial incentives. Are there things that we also need to do, like resk killing a workforce that need to take place in order to make some of these dreams and a reality. Absolutely,

we would need to. Governments need to take into accounts the need to re educate and to train a workforce, and this will need to be done sufficiently early, so as when the people like Dana want to go buy a non fosil fuel boiler, there are people already with the required skills to do so. Okay, So in the near term, we've seemed to have solved my problem, or at least we will in the next couple of years, and I can get my guilt free shower soon enough.

In the meantime, we looked at these specific countries, these archetypes in Europe with the intention that we could extrapolate this out across the rest of Europe potentially. Are there other commonalities that we can see in other things that we think that other countries, maybe in Asia, Africa, even North America? What can they take from this report if they're not located in Europe, and have they frightening lee

similar looking grid? So it's coupling. Isn't a European thing. Yes, the term might be European at the moment, but electrification more broadly can happen anywhere, but it would have different permutations and different implications in terms of the policies regard to kick start the process itself and to enable that set to coupling doesn't have a detrimental impact on the power system. I think anywhere that sort of seriously thinking about getting to net zero needs to think about this topic.

A good example of New York State where they now have this Green New Deal that's targeting carbon neutrality. By New York looks a bit like some of our Northern European archetypes because it gets cold, so they have heating demand, they have some industrial demand, etcetera. So it's not a bad proxy, and they are funding about seven billion dollars over the current five year period for energy efficiency measures in buildings, including heat pumps, including electrification, but also just

making those buildings more efficient. We did look at a Southern European archetype, which is a bit different because it doesn't get cold, and actually what we found was some of the elements are a bit easier because if you've got less heating demand, first of all, you don't have as much of this sort of flexibility problem in the winter.

You've also got seasonal balance because you've got more air conditioning demand, which manifests in the summer, so actually it could be more economically favorable, you know, this sort of transition that we're talking about in southern latitudes. So before we wrap up, which of the subsectors of transport buildings in industry do you most want to see really succeed, Because I'm telling you right now you know that it's

the water boiler issue for me. I think I would like the hardest to a boat sector for me is cement. It's got really long asset lives for various reasons. It's difficult to use the harmon capture and storage and to introduce green hydrogen. It also accounts for a large shared energy consumption within Europe. So I'm going to go with cement. I was actually going to go with buildings for the same reason, but just with a slightly different take, because I think some of these things are going to be

easier than other thing. Evis are becoming quite sexy. I think people want them. Buildings are almost the elephant in the room that if you're serious about net zero as a policymaker for me, the way that you show that you're serious as you really get to grips with the buildings issues, particularly northern Europe, because it's difficult. We've got drafty buildings, You've got millions of them that are owned by different people that don't that sometimes don't live in them.

It's such a thorny problem and I think if we can crack that, it means we're on our way. So in order to get there, now, what would you guys recommend as the most impactful policy recommendation that you could make? So for me, one of the surprising things was the increasing importance of the men on the street. We've seen in various countries across Europe there have been increasing public

opposition to new wind and solar plants, particularly wind. But if we want to have a green sector coupling, we need more wind and solar plants and we need them to actually be able to be built. Likewise, with these, we need to be able to reinforce the transmission grade, so we need to be able to build some of

that not underground because that's incredibly expensive. And we also need for the man on the street to be able to choose the right electricity to tariffs so that they respond to price so they can change so they don't all want to change their e V at exactive same time as they want to use the heat pump. So for me, it's policies to get the man on the street on board. Okay, So maybe it's just education. To be honest, I think we might need a bit more, a little bit more than a kick, Okay. So not

everybody finds wind turbines as beautiful as I do. No, Sadly, I think we might need at least some financial incentive, Okay, Albert. So in the report we go through sort of what do we need to do on market design, what do

we need to do on sector integration, etcetera. I'm going to zoom right back out and just say in the end, this is really about decarbonization, and none of this happens unless they are real, long, last incredible incentives um and regulations and mandates and so on to decarbonize these hard

sectors what be at buildings, steel, etcetera. And we say in the report, in this Northern European archetype, we could electrify fift these sectors by It kind of doesn't matter if we're right or wrong about those numbers, because if we put in place the incentives to decarbonize, whether it's through electrification or through other means, that's really the key thing. So we might be slightly wrong on the margins of how much gets electrified, is how much it's still gas

and so on. That doesn't matter, but we just need the policies in place. Okay, so viva policy. Let's see that. Hopefully I'll come to pass. Vicky and Albert, thank you so much for joining us today. Thank you for having us. Bloombergina is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor it should it be construed as investment advice, investment commendations, or a

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