I’ve Got The Power!

The Future of….Energy
– by Guy Winter, Partner, Addleshaw Goddard

In 1974’s noir classic Chinatown– arguably Hollywood’s greatest-ever movie about the ‘Water-Energy-Food Nexus’- Jack Nicholson’s character, hard-boiled PI J.J. Gittes, says of supply from LA’s Water and Power corporation: “Before this- I turned on the faucet, it came out hot and cold, I didn’t think there was a thing to it.”

Now Jack- and his fellow Californians- know all about the value of water. Since the Western U.S. Energy Crisis of 2000 and 2001 and, more recently, prices at the pump that have already fluctuated by nearly a buck and a half per gallon in the last 12 months, they know all about power uncertainties too.

What is still less well-known is how intertwined their- and the world’s- water and energy futures truly are. To understand how the Water-Energy Nexus works, you only need to drive your 1937 Buick 85 miles down south from Chinatown.

When the Carlsbad Desalination Project opens in 2016, it will be the largest ocean desalination plant in the Western Hemisphere, purifying 50 million gallons of drinking water a day for thirsty San Diego County.

This is a conventional reverse osmosis plant that smashes 100 million gallons of seawater a day through state-of-the-art membrane filters. The salt and other nasties are left behind, leaving Greater San Diego with all that lovely freshwater- plus the bill for 38 megawatts of average continuous energy (let’s say, US$50 million per year).

To put that power demand in context, a modern, commercial-scale wind turbine- the type you may see in the British countryside, and cuss at if you’re Donald Trump- has a maximum generating capacity of 2.5-3MW. And- as Donald will doubtless tell you- only generates that intermittently.

So that’s the rub: you can have as much water as you have the power to desalinate (or to pump from somewhere else). Oh, and you can only have as much power as you have water to generate it with.

Here in the UK, the electricity generation sector is by far the largest licensed abstractor of water of all sectors of the economy, including public water supply. Meanwhile, our water industry uses up to three per cent of total energy used in the UK, treating and transporting water and wastewater.

And that’s in this watery isle- desert kingdom Saudi Arabia burns 1.5 million barrels of oil every day to desalinate water. Even at today’s oil price (which we’ll come onto), that’s a water bill of US$70.5 million per day- US$25,732,500,000 per year.

If their water consumption continues to grow at its current rate, by 2040, they will be burning all their oil just to satisfy domestic freshwater consumption. This is what brings empires to their knees; that changes the economic geography of the world.

Coal-fired generation supplies 70% of China’s electricity needs, much of it via old-fashioned water-cooled facilities. But since there’s no water in the arid, industrial north of the country where the energy is needed, China simply can’t build the new coal-fired capacity it needs to power projected growth in energy consumption of 60% by 2035 (Source: BP Energy Outlook 2035). In fact, BP projects that by 2035, China will become the world’s largest energy importer, overtaking even resource-constrained Europe.

All of this sets the scene for a future that will prize both water and energy (because they’re kind of the same thing) hugely more than at any time since the Industrial Revolution began to tap the world’s resources with unprecedented voracity and technical prowess.

2015 was the first year in which water crises took the top spot in the World Economic Forum’s Global Risk Report. Whilst in Africa, with its growing middle-class and a young population which will form 23% of global workforce by 2050, only 290 million out of 915 million have access to electricity- and the number without is actually GROWING.

I had the incongruous experience of sitting in the first world splendour of one of Lagos’ finest restaurants (unfair to name it, since this could have happened anywhere on the island), talking to excited Nigerians about their country’s boundless possibilities, only for the lights to cut out three times before our starters arrived.

And Nigeria has the ninth largest proven natural gas reserves in the world (US$2.5 billion dollars of which is literally burnt off as a waste-product from more lucrative crude oil production every year- because there aren’t the pipes to transport it or the power-stations to sell it to).

For now, Nigerians pride themselves on their expertise in tinkering with their (exorbitantly expensive) diesel back-up generators at home.

In the West, almost all economic activity over the last 250 years has been massively subsidised by cheap energy from fossil fuels and (since the Age of Steam may be over for the railroads, but it certainly isn’t for the power sector)- water. That game is up.

As I look at my screen this morning, the spot price for Brent crude is under US$50. In theory this represents a value transfer from net oil-producing states back to net oil-consumers (such as the UK).

The reality is that this is no longer a zero-sum game, but part of a long-term structural change that will see the costs of finding, producing and transporting Oil & Gas creep relentlessly upwards- until ultimately some of it is simply left in the ground.

There may currently be quirks of supply and (in China’s case) plummeting demand, but paradoxically the present glut of cheap oil is deferring final investment decisions on new Oil & Gas projects (estimated by O&G gurus Wood Mackenzie to be worth around US$1.5 trillion), storing up an investment shortfall that guarantees a volatile future for the medium-term market. So Oil & Gas won’t be subsidising anyone indefinitely.

US shale oil and gas is not necessarily cheap to produce- but it is developed by hugely flexible, innovative and incentivised operators, in exactly the right place to sell it into a vast and lucrative market.

That’s why the US shale producers are the new “swing producers”, replacing OPEC- which now seems to have let the supply-side genie out of the bottle forever. US shale is the bogeyman to OPEC (itself once dubbed ‘One Purely Evil Cartel’ in the land of the free) because it now represents an effective cap on the oil price.

Nimble (i.e. non State-controlled) oil companies can ramp up production in the Eagle Ford, Bakken or Marcellus Shales very quickly when prices for sweet, light crude pass the break-even for given fields, and consistently drive production costs down by squeezing the supply chain for greater efficiencies and innovation.

In the wider world, over 40% of global electricity is still produced from coal- but with the International Energy Agency warning this year that without further action on emissions from coal-fired power plants, nothing can reverse global warming beyond the 2 degree threshold for irreversible dangerous climate change and the G7 aiming to reduce fossil fuel emissions by up to 70 per cent by 2050, coal-fired generation capacity in Europe and North America is falling off a cliff.

What then does the future look like, without Old King Coal and JR Ewing to prop up the bar? As always, it is already partly with us:

1. All retail and consumer-focussed companies will be energy companies too: the need for predictably-priced, reliable energy and the financial and reputational cost of large residual waste footprints is already driving the sector to innovative, small-scale renewable energy and Energy-from-Waste projects (solar panels on the factory and car-park roof; wind turbines on the industrial estate; on-site anaerobic digestion, gasification and pyrolysis Energy-from-Waste treatment processes).

2. Existing assets will be sweated more: why not use the idle back-up diesel generator your hospital is required by law to maintain, to off-set intermittent renewable energy from nearby wind and solar generation?

3. Demand-side energy and water management and technology will slash consumption- that means smart meters, smart appliances (smart fridges!), electricity storage (maybe even via Tesla electric car batteries), efficient domestic boilers and telemetry systems to identify and help fix leaking pipes. On the idyllic western shore of Lake Como, our client Xylem Inc. helped the local pumping station to cut energy use by 30 per cent, with an intelligent control system that automatically adjusts the rotation speed of the pump impellers, to deal with the changing composition of the input water.

4. Big thermal power stations and their iconic, brutalist cooling tower stacks will continue to dwindle in number- the new Hinkley Point 3.2GW EPR nuclear power station in Somerset bucks that trend, but at a projected cost of £24.5 billion; almost certainly we will need a new generation of Combined Cycle Gas Turbine (CCGT) power stations before renewable energy is ready to keep the lights on; but unless vital, exciting but criminally-ignored Carbon Capture and Storage (CCS) technology is developed at scale to catch CO2 from fossil fuel-burning power stations and send it by pipeline for burial in depleted North Sea gasfields (or somewhere), the energy landscape will have to change dramatically if the UK is to hit ambitious G7 and EU emissions targets.

5. It looks like being another American Century- the US Shale Revolution is an incredible vindication of America’s innovation and the economic invigoration of freedom (as well, perhaps, as the precept that fortune favours the brave). We still don’t know the full extent of the economic boost American industry will receive from the chemical feedstock (especially ethane, for ethylene cracking) to be found in “wet” shale gas plays. China has huge shale gas reserves too (more, by volume, than the US), but not the rigs, technical data or water to exploit them. But necessity may yet be the mother of a Chinese 22nd Century, as China’s vast investment in renewable energy (and watch Germany too, with its extraordinary, trillion euro Energiewende blazing a remarkable renewable energy trail in Europe) could build a low-cost, reliable energy supply to power its manufacturing sector- just as America and the rest of the world finally hits the hydrocarbon wall.

6. It may or may not mean UK shale gas development, as a “transition fuel” into a truly renewable future. But that’s almost too close to call right now, with a huge glut of Liquefied Natural Gas (LNG) about to hit world energy markets, and pent-up, low-cost supply wreaking havoc with hydrocarbon prices for the foreseeable future. The great allure of UK shale is arguably not the prospect of Blackpool or Preston turning into the Dallas of the North, so much as security of supply in the event of political upheaval in Russia or the Middle East- and that chemical feedstock to keep the crackers at Grangemouth and Teesside running competitively.

7. Most likely of all is that if we can just go a bit easier on the world- put an end to slash-and-burn energy and water use, manage demand and use transition fuels such as natural gas and renewable energy more shrewdly- then technologies that we are only scratching the surface of now will save it. A friend of mine (and of the editor of this series) has recently been involved in the successful £22.7 million funding round by First Light Fusion, a spin-out from the University of Oxford, which has discovered new implosion processes that can achieve the high temperatures and compression necessary for nuclear fusion reactions. If they (or any of the rival and complementary technologies being developed in the UK and around the world) can get to commercial application- then that changes everything.

As Eddie Redmayne / Stephen Hawking says in The Theory of Everything (Hollywood’s greatest ever movie about the resilience of science?): “While there’s life, there is hope.” Water and energy are the essence of life, and there is definitely hope.

– with thanks to the author, Guy Winter, Partner at Addleshaw Goddard.