Powering Asia through Technology

Interview with Peter Hughes
February 27, 2012

In advance of the 2012 Pacific Energy Summit, to be held in Hanoi, March 20–22, 2012, NBR asked Peter Hughes, Director and Head of the Energy Practice at Ricardo, a multi-industry energy consulting firm, to outline the important role that new technology can play in addressing Asia’s rapidly rising energy demand.

Over the course of the next two decades, three billion people will join the middle class, many of them from emerging economies in Asia. The corresponding growth in energy demand will be felt most acutely in the power-generation sector. The twin challenges of meeting rapidly expanding energy demand to ensure economic growth and mitigating the associated environmental impacts are core issues on the agenda of the 2012 Pacific Energy Summit, to be held in Hanoi, March 20–22, 2012. In advance of the meeting, NBR asked Peter Hughes, Director and Head of the Energy Practice at Ricardo, a multi-industry energy consulting firm, to outline the important role that new technology can play in addressing Asia’s rapidly rising energy demand.

The 2012 Pacific Energy Summit brings power generation to the fore among a number of competing energy issues. In your view, why is power generation an issue of critical importance?

A nation’s power-generation capacity and its economic growth are closely related; increased access to electricity increases productivity, which enables the process of wealth creation. Increased wealth, in turn, heightens demand for electricity. Because of this interdependence, access to a sufficient supply of electricity becomes a prerequisite for sustainable growth.

In spite of recent progress, many parts of the Asia-Pacific are still underserved by existing electricity networks. National authorities are confronted with a need to make important decisions about how best to build out their power infrastructure to meet this unmet, and growing, demand. In doing so, these regulators must reach a balance between several, often competing objectives. In most cases, trade-offs will need to be made between cost, security of supply, reliability, environmental impact, and public acceptability. These strategic choices must be considered carefully because investments made today, particularly for large centralized plants, will shape a country’s power system for the next 30-plus years.

You are among a number of experts attending the Summit who have prepared policy papers detailing different approaches to addressing supply and demand in the power-generation sector. The search for practical solutions leads to diverse options, and you have highlighted technology as a key driver of productive power markets. Could you describe the innovations that offer the greatest potential to power Asia’s growing economies?

My paper with Scott Hare and Maite Pina discusses the opportunities that exist for distributed energy systems, looking beyond the large-scale, centralized mindset that constitutes the conventional wisdom of the sector. There are two key areas of innovation that are making these systems a viable alternative: communications and information technologies, on the one hand, and significant cost reduction in renewable energy technologies, on the other.

The first area highlights the progress that has been made in deploying wireless infrastructure across most parts of the Asia-Pacific, which has, for example, enabled the market for affordable smartphones. These handheld devices contain more processing power than the average personal computer did ten years ago. This high level of connectivity and remote computing power addresses one of the prior barriers to distributed energy—namely, the ability to gather information and control disparate devices so as to match power supply and demand in real time.

Second, technologies such as solar, biomass, and wind have progressed up the learning curve though ongoing research, development, and deployment. Obviously, not every technology will work in every situation; but what this does provide is a much wider choice of viable options for power network planners, allowing them to build systems that best align with their strategies.

Approximately 675 million people in the Asia-Pacific region still lack access to electricity. You have cited decentralized energy (DE) as an alternative to the traditional, centralized power-generation model in the effort to electrify poor and remote communities. How would this approach work? What are the key benefits over the centralized model?

In a decentralized system, there is a close relationship between supply and demand. Generation is put in place to meet a specific requirement, with very little extra capacity needed; the load is often reduced when this capacity is exceeded. As the base demand increases over time, generation is typically increased in a modular fashion. Though many systems are in remote areas, creating virtual “islands,” they can still be connected to a centralized grid. This allows for a local primary source of energy, while allowing the grid to provide backup or extra power during peaks.

DE systems utilize a variety of technologies, each with a unique set of benefits and drawbacks. However, when compared with centralized infrastructure, there are generally three key benefits that can be realized. First, by their nature of being close to the load, DE systems eliminate most of the transmission and distribution power losses; in the Asia-Pacific this is typically between 5% and 15%. Second, DE systems are typically modular and can be both deployed and scaled up relatively quickly. By comparison, large, centralized systems, because of their scale and footprint, typically go through a long period of assessment and review before obtaining the necessary approvals. In order to enjoy the benefit of economies of scale, such systems by definition have to be built ahead of the demand growth that they anticipate, and accordingly with excess capacity. This can potentially create several decades of infrastructure lock-in. Finally, DE systems are often easier to finance due to their smaller scale. This enables communities to actively participate in building their own power infrastructure, which gives an economic boost to areas that need it the most by providing construction and operations jobs for the plant and fostering the growth of other local industries.

Moving away from a centralized to a decentralized system requires a considerable paradigm shift. What are the greatest obstacles to adopting a nontraditional approach to power generation?

Many existing power-generation assets will continue to be in use for the next few decades, so decentralized systems will need to fit into this infrastructure. The required paradigm shift is for system planners to consider all the possible options available when expanding capacity, not just the ones that they are most familiar with. The current instinctive response to add another centralized plant and run new transmission and distribution lines may still be optimal in some cases. However, in other cases a DE system may be better-suited, offering, for instance, better return on capital, faster deployment, or local job creation. The key is to make sure that all the benefits and costs have been considered so that the system implemented is right for the task.

The largest obstacles to DE systems are structural. Many grid management systems are designed around matching demand fluctuations using a relatively small group of generating plants, and often with a significant degree of manual intervention. Controlling many DE systems requires investment in a much more sophisticated and automated grid-balancing system. Access to the grid should also be made on equal terms regardless of the size of the generator, but the cost needs to be proportional to the scale of the plant. The regulatory and financing structures should also be determined by the size of plant. For instance, a small “run of river” hydro project does not require the same level of environmental impact assessment as a large hydro project that involves damming and flooding a river system. Finally, the financing requirements are also vastly different and may in some instances, for example, need to be met through microfinancing loans and grants rather than through complex project financing mechanisms.

The field of energy has seen an influx of nontraditional players. In the past, you have noted the importance of IT companies such as Google and Cisco. What role might they play in efforts to match energy supply with escalating demand?

Integrating smaller-scale dispersed generators into a larger grid network requires a substantial amount of data communication and processing in order for grid operators to balance supply with demand in real time. Information and communication technology companies, though not incumbent to the energy sector, are using the convergence of the two sectors to expand their business. Google, for instance, is promoting the Android smartphone platform as a general appliance operating system in Android@Home. This is a key trend of the smart grid, where end- use devices need increased processing power to use energy more efficiently. Google is hoping that appliance manufacturers will utilize the Android platform rather than design their own.

Cisco has adopted smart-grid technologies as a key part of its business model, offering a “complete communications fabric” of networking equipment and software to manage the data flow and network management systems for grid operators to monitor and control millions of devices in the field. This convergence is widespread, and many technology companies, including Intel, Microsoft, and IBM, are developing products and services for the emerging smart-grid market.

Most new technologies require incentives for R&D, coupled with solid links to market deployment. What are the policy options for facilitating successful innovation and implementation in the energy sector?

A market-based approach is often the most successful method for promoting innovation. What is most important for policymakers in the case of DE systems is to support deployment and remove barriers that would otherwise prevent the market from converging on the most promising technologies. When there is a stable and growing market and a reliable and predictable regulatory framework, companies will usually be prepared to invest in developing and deploying the necessary technologies.

The key role for government to play is to set the general strategic direction and priorities for the energy sector and utilize policy, regulation, and financing levers to provide the right market signals consistent with the overall energy strategy. For instance, if market deregulation is of strategic importance, country leaders should make grid connection costs more dependent on project scale and create microfinancing mechanisms to allow smaller firms to participate in the market. Likewise, to promote renewable energy or achieve security of supply objectives, governments should actively support projects that meet these criteria by providing, for instance, guaranteed generation tariffs or capital grants.

You have emphasized the need to reimagine power generation in order to make it more accessible for all. What role do you see the Pacific Energy Summit playing in this process?

In order to make the best decisions for their countries, policymakers need to be aware of all the options available. By providing a forum for policymakers, financiers, and developers to interact and discuss the main energy-related issues, the Summit allows concepts like distributed energy to be communicated to audiences that may not have previously considered or been fully aware of them. While the specific situation in each country may be different, a lot can be learned from the experiences of others, both successful and unsuccessful. This exchange of information and ideas could prove invaluable in terms of helping country leaders to achieve their strategic energy objectives in full awareness of the different options and their associated risks, costs, and timescales.

Peter Hughes is Director and Head of the Energy Practice at Ricardo, a multi-industry energy consulting firm.

This interview was conducted by Jacqueline Koch, Senior Media Relations Coordinator at NBR.