Speaker 1: Hi everyone. Today we'll do an interview Danta did before
Speaker 1: we all went home. She'll be talking with Albert Chung,
Speaker 1: venis head of research, and Vickie Cumming, who leads international
Speaker 1: policy research for BENF. They'll discuss some of the findings
Speaker 1: from a report BENIF wrote in partnership with Eaton and
Speaker 1: Statcraft titled Sector Coupling in Europe Powering Decarbonization. If you'd
Speaker 1: like to dig deeper into our findings, this report is
Speaker 1: available on BENF dot com, on the Bloomberg terminal at
Speaker 1: BENF Go, or for free at eaton dot com. That's
Speaker 1: E A T O N dot com. Please note that
Speaker 1: BENIF does not provide investment or strategy advice, and you
Speaker 1: can hear a full disclaimer at the end of the show.
Speaker 1: I'm Mark Taylor here with Dana Perkins, and you're listening
Speaker 1: to switch it on to BENIF podcast. Hi, Vicki, Hi Albert,
Speaker 1: Thank you for joining us today. Hi Danna's Pleasures be on.
Speaker 1: Thank you for having us so we are here to
Speaker 1: talk about sector coupling. And I must say, for the listeners,
Speaker 1: I was very lucky I got to actually attend the
Speaker 1: event where we unveiled the report that we're talking about today,
Speaker 1: and it was a pretty fun event because actually it
Speaker 1: took place on Valentine's Day and it was a sector
Speaker 1: coupling event, so there were a lot of amazing jokes
Speaker 1: to be made about coupling. But really, let's talk about
Speaker 1: this a little bit more, because sector coupling doesn't naturally
Speaker 1: intuitively make sense as a title until you explain to
Speaker 1: us what it actually means. Set a coupling look at
Speaker 1: a confusing term, but it's a term that's well understood now,
Speaker 1: I think in the European energy industry at least, sometimes
Speaker 1: it's called sector integration, and really it's about greater integration,
Speaker 1: greater interaction between the power and gas systems and also
Speaker 1: the three demand side sectors that we covered in the report,
Speaker 1: and that's transport, buildings, and industry. So it's really about
Speaker 1: how those five sectors are going to be more interconnected
Speaker 1: in the future and how that contrived dcobonization. One of
Speaker 1: the guests on the panel, his name was Lord Turner,
Speaker 1: and he's actually Chair of the Energy Transitions Commission, and
Speaker 1: one of the things that he brought up during the
Speaker 1: event was that really it's about electrification, so why are
Speaker 1: people generally calling its sector coupling rather than just electrification. Well,
Speaker 1: electrification is a large part of sector coupling. It was
Speaker 1: the focus of our study. We looked at both direct electrication,
Speaker 1: which is plugging things into the grid, so like electric
Speaker 1: vehicles or he pumps, but also indirect electrification, which is
Speaker 1: electrolysis powered by renewable energy which makes it green hydrogen.
Speaker 1: So electrification it's a large part. But there are other
Speaker 1: aspects of sector coupling as well, And I think it
Speaker 1: would be remiss for us to get too deep into
Speaker 1: this discussion before we acknowledged the fact that we did
Speaker 1: not go it alone. We did this with Statcraft and Eaten.
Speaker 1: So why were they such good partners for us to well,
Speaker 1: one might say, couple with in order to write this report.
Speaker 1: I can't believe you went there. As you know, most
Speaker 1: of our work it goes behind the b n F
Speaker 1: pay wall. Once in a while when one of our
Speaker 1: clients has a really bright idea about something that we
Speaker 1: should spend time on together and put out into the
Speaker 1: public domain. Um, you know, the conversations get going. And
Speaker 1: that's exactly what happened here. They already came to us
Speaker 1: and said well, in Europe, everyone's talking about sector coupling.
Speaker 1: Everyone's talking about how do you get to net zero?
Speaker 1: By what's the role that the power and gas sectors
Speaker 1: have to play in that? Can we explore that together?
Speaker 1: We wanted to do three things with it. One was
Speaker 1: to map out a plausible pathway for coupling, out what
Speaker 1: that would mean for the power sector. And then the
Speaker 1: third part of it was really from a policy perspective,
Speaker 1: what are the considerations what should policy make has been
Speaker 1: thinking about? Let's start with point one, because that's where
Speaker 1: I get really excited about this topic, because really you're
Speaker 1: sitting there thinking, Okay, well, why should I care? I mean,
Speaker 1: maybe everything will just run more efficiently. But if things
Speaker 1: run more efficiently and they lead to fewer emissions, this
Speaker 1: has a huge benefit for I guess life on Earth.
Speaker 1: So net zero by in we're talking about Europe here, correct,
Speaker 1: The study itself is about Europe, but we focused on
Speaker 1: a country like the UK or Germany, which we call
Speaker 1: the Northern European archetype. And one of the really good
Speaker 1: things about sector coupling is that it makes use of
Speaker 1: the decarbonization progress that's been made in the power sector
Speaker 1: already so it takes that progress and then uses it
Speaker 1: for other sectors like transport or buildings which are reliant
Speaker 1: on fossil fuels at the moment. We found with this
Speaker 1: plausible pathway that Albert mentioned that if applied, it could
Speaker 1: lead to a sixty reduction in greenhouse gas emissions across
Speaker 1: these three big sectors industry, buildings, and transport, by which
Speaker 1: make up roughly what percentage of the emissions pie that's
Speaker 1: roughly about okay, so six of a pretty gigantic chunk
Speaker 1: we're looking at here. Who are the winner and all
Speaker 1: of this are their new industries popping up in new
Speaker 1: companies that are going to benefit or is this all
Speaker 1: pain for the emissions gain? I think we're talking about
Speaker 1: a massive industrial shift. So transport is road transport, it's aviation,
Speaker 1: it's marine. You're talking about a pretty much complete switchover
Speaker 1: to electric vehicles on the road, and buildings. In our pathway,
Speaker 1: we envision pretty much complete switch over from phospipl fuel
Speaker 1: based heating to either electrification via heat pumps or two
Speaker 1: clean gases. So there's a major shift in terms of
Speaker 1: the equipment that you're going to go into buildings. Same
Speaker 1: thing in terms of industry, whether it's sort of steal cement, methanol,
Speaker 1: chemicals and so on, really big changes, So there are
Speaker 1: going to be opportunities. We try to only include technologies
Speaker 1: that are going to have a fighting chance of being
Speaker 1: competitive between Some of them are competitive, like we see
Speaker 1: evs being competitive very soon. That's probably the nearest in
Speaker 1: terms of transitions out out of all the technologies we
Speaker 1: looked at in the study. So it's not just about pain,
Speaker 1: it's about opportunity. If these technologies are approaching competitiveness, that
Speaker 1: creates an industrial opportunity. Well so should we taught next
Speaker 1: maybe a little bit about some of the policy and
Speaker 1: mechanisms that are going to need to be in place
Speaker 1: in order for some of these areas to take off,
Speaker 1: because some of them are already well on their way.
Speaker 1: So electric vehicles, as we've discussed, seemed to have quite
Speaker 1: a bit of momentum no pun intended at this point
Speaker 1: in time. But there are other areas where mainly I'm
Speaker 1: actually immediately thinking about heat pumps that might need a
Speaker 1: little bit more incentive in order to get things where
Speaker 1: they need to be. Yes, exactly, So for our plausible pathway,
Speaker 1: we had to make some assumptions of policies that would
Speaker 1: be necessary to kick start the shift away from fossil fuels,
Speaker 1: and so for certain types of buildings we assumed that
Speaker 1: there was bands on connections to the gas grid, which
Speaker 1: has taken place in the Netherlands for example, absolutely, and
Speaker 1: it's being envisaged in this country and in Germany as well,
Speaker 1: this country being the UK apologies yes. And also in
Speaker 1: the industry side, we assumed that because at the moment,
Speaker 1: industry is one of the sectors that's made the lead
Speaker 1: to progress towards de carbonization because of this concern about
Speaker 1: carbon leakage. So that's the concern that companies will move
Speaker 1: to jurisdictions that have less ownerous carbon regulations so they
Speaker 1: therefore have easier time, for example in the EU emissions
Speaker 1: trading scheme. But for our pathway for this report, we
Speaker 1: assume that governments would have to implement policies to ensure
Speaker 1: the industry at least make some effort towards decarbonizing and
Speaker 1: moving away from fossil fuels. Which ones maybe have more
Speaker 1: potential to decarbonized sooner, it's an interesting question. So in
Speaker 1: some of these industries like iron and steel, cement, they
Speaker 1: have big assets with very long lives. So even if
Speaker 1: we're talking about a shift that needs to happen by
Speaker 1: twenty fifty, they need to be planning it now and
Speaker 1: they would need government support to push it through. Whereas
Speaker 1: in some of the industries that don't lie on such
Speaker 1: high temperatures like food and drink, pop and paper, they
Speaker 1: may be able to make more progress sooner. I would
Speaker 1: also say in terms of urgency, seems a long way away.
Speaker 1: The European Commission is thinking about sector integration and strategies
Speaker 1: right now. The direct electrification technologies that we've covered, whether
Speaker 1: it's EVS or heat pumps as such, bottom up, plug
Speaker 1: and play technologies. They don't require system change on an
Speaker 1: individual basis. You can start to install these technologies as
Speaker 1: long as the incentives are in place. Well, you have
Speaker 1: to have a longer horizon. Is some of the pathways
Speaker 1: that involve power to gas, where you're talking about more
Speaker 1: of a system change. You're talking about creating green molecules.
Speaker 1: You're talking about transporting those green molecules, storing them, changing
Speaker 1: out the equipment of the demand side to use those
Speaker 1: green molecules. And I think there's a wide recognition not
Speaker 1: only in Europe but elsewhere that if we want to
Speaker 1: be serious about that move in Theties, we've got to
Speaker 1: start thinking about it now and scaling it up and
Speaker 1: doing part of projects today. So I think that's where
Speaker 1: the discussion really is at the moment. These are major
Speaker 1: infrastructure projects. But would you say that there is a
Speaker 1: large gap between where we are and where we need
Speaker 1: to be from a technological standpoint or is it really
Speaker 1: just around technologies exist, but the economics aren't. Fully they're
Speaker 1: so the government incentives would need to support that in
Speaker 1: order to speed that time horizon. Is it fall into
Speaker 1: a little bit of both or one of the two.
Speaker 1: In large part of the technologies have already been developed,
Speaker 1: it's more a question of scaling up commercialization and bring
Speaker 1: down the costs. Okay, So hydrogen is a prime example
Speaker 1: of this, and some of these pathways are geographically constrained.
Speaker 1: If you want to have a hydrogen based gas grid,
Speaker 1: it's likely to happen at a local level. What we're
Speaker 1: talking about is clusters of places that integrate all these technologies,
Speaker 1: and so while the individual technologies may exist, what we
Speaker 1: need now is to prove out the clusters that you
Speaker 1: can combine and couple these technologies in one place the
Speaker 1: title It's a gift that keeps on giving. So let's
Speaker 1: talk a little bit more about the power system. One
Speaker 1: of the things that you guys were looking at in
Speaker 1: this report and trying to get a little bit deeper
Speaker 1: on is what all of these changes could actually mean
Speaker 1: on that side. So right now we have gas feeding in,
Speaker 1: we have power, you have electricity demand, You have a
Speaker 1: variety of different things, and all of those balances would share.
Speaker 1: Left can we make that shift fairly quickly? And what
Speaker 1: parts would need to fundamentally change in order to make
Speaker 1: sector coupling and this potential in emissions a reality. So
Speaker 1: sector coupling would indeed have an enormous impact on the
Speaker 1: power system. For one thing, the power system would need
Speaker 1: to be much bigger because we would expect electricity demand
Speaker 1: to increase far faster and higher than it would without
Speaker 1: sector coupling. The plausible pathway that we mentioned earlier, for example,
Speaker 1: would mean that power demand would nearly double by fifty
Speaker 1: compared with a scenario without sector coupling. So that would
Speaker 1: mean about three quarters of amount of extra generating capacity
Speaker 1: would be needed to meet that demand. And in our
Speaker 1: low cost analysis. Much of that demanan we met by
Speaker 1: wind and solar farms. It's also not out of line
Speaker 1: with what we've seen over the last three decades of
Speaker 1: power system growth in the EU and looking forward the
Speaker 1: next three decades, it's about the same. But that makes
Speaker 1: it sound easy, it's not. I think one of the
Speaker 1: key issues is how do you increase electricity transmission capacity,
Speaker 1: particularly since we already see challenges in places like Germany
Speaker 1: where people just don't want these things to be built
Speaker 1: through land that they own, for example. That's really one
Speaker 1: of the key challenges we highlight in the report that
Speaker 1: we sort of throw at the door of policy makers
Speaker 1: is to say, if you're serious about sector coupling or
Speaker 1: sector integration, what are you going to do about networks?
Speaker 1: How are we going to get the electricity networks built
Speaker 1: to what extent can we rely on gas networks as well?
Speaker 1: To move green molecules instead of green electrons as well?
Speaker 1: Because there is already an increase in electricity demand even
Speaker 1: without this push is they're not well. I think in
Speaker 1: a country like the UK and Germany, power demand growth
Speaker 1: has really leveled off due to things like energy efficiency.
Speaker 1: But while what outbuts says is correct in terms of
Speaker 1: it could be a similar rate if it was like
Speaker 1: a smooth trend upwards. But the problem is we don't
Speaker 1: expect it to necessarily be a smooth trend upwards. For example,
Speaker 1: it could be much steeper in the latter half of
Speaker 1: the period when you start to see some sectors in
Speaker 1: the industry switching to electricity. Also, it could be lumpy
Speaker 1: in terms of across the grid, so where the increase
Speaker 1: in power demand across say the whole transmission grid could
Speaker 1: be exper sent at very local levels where you might
Speaker 1: have suddenly have an entire street in stores, electric vehicles
Speaker 1: and heat pumps. It could be much higher. And there
Speaker 1: is a lack of data visibility and communication between all
Speaker 1: the grid operators and the consumers and drivers of electric
Speaker 1: vehicles and the automakers as to who is installing these
Speaker 1: electrifification technologies, so it makes it very difficult to predict.
Speaker 1: That leads onto another key element of the report, which
Speaker 1: was looking at this issue of flexibility. Now we know
Speaker 1: that flexibility becomes important in a high renewable power system,
Speaker 1: whether or not you have sector coupling. Once you add
Speaker 1: in high electrification of the economy, you are in a
Speaker 1: situation where you're potentially massively increasing, for example, your winter
Speaker 1: evening peak. We did a partial analysis looking at EV's
Speaker 1: and buildings I think it's just residential buildings actually, and
Speaker 1: we found that your winter evening peak could be fifty
Speaker 1: bigger on a typical winter's night if you can't flex
Speaker 1: those loads. Whereas if you have smart EV charging and
Speaker 1: you have a reasonably well insulated building stocks, so you
Speaker 1: can preheat your homes before you get home, for example,
Speaker 1: a couple of hours before, and you can start to
Speaker 1: shave that peak pretty significantly. And that's not only so
Speaker 1: that you can run less power generation. It means you
Speaker 1: can have a smaller grid. It also means you have
Speaker 1: lower emissions because if you're moving that load to some
Speaker 1: other part of the day, you're likely to be able
Speaker 1: to use more renewables versus that winter evening peak when
Speaker 1: you're probably using fossil fuels to meet that load, So
Speaker 1: that the importance of demand side flexibility with such coupling
Speaker 1: is even greater than what we already thought with a
Speaker 1: higher renewables power system. Well, so this is great because
Speaker 1: this leads us directly into consumer uptake. I think, and
Speaker 1: really you, me, everybody who's listening, and how we interact
Speaker 1: in the real world. And I'm gonna admit that I've
Speaker 1: come to this with a real life example that I
Speaker 1: am currently struggling with. So I need a new water boiler,
Speaker 1: and I must tell you taking a hot shower is
Speaker 1: one of my favorite things in the world, but it
Speaker 1: comes with the guilt of knowing that I am burning
Speaker 1: all of that gas to get myself some hot water.
Speaker 1: So if I could just have an electric water boiler
Speaker 1: that would then enable me to have a guilt free,
Speaker 1: warm hot shower, that would be amazing. Yet in the UK,
Speaker 1: so one of the countries that we're talking about as
Speaker 1: an example here, I am having trouble finding a plumber
Speaker 1: that can install heat pump or that will even tell
Speaker 1: me that they're reliable. So can we talk a little
Speaker 1: bit about some of this gap that exists and maybe
Speaker 1: where we might beyond the typical policy mechanisms that we're
Speaker 1: talking about, where you have regulations and then other financial incentives.
Speaker 1: Are there things that we also need to do, like
Speaker 1: resk killing a workforce that need to take place in
Speaker 1: order to make some of these dreams and a reality. Absolutely,
Speaker 1: we would need to. Governments need to take into accounts
Speaker 1: the need to re educate and to train a workforce,
Speaker 1: and this will need to be done sufficiently early, so
Speaker 1: as when the people like Dana want to go buy
Speaker 1: a non fosil fuel boiler, there are people already with
Speaker 1: the required skills to do so. Okay, So in the
Speaker 1: near term, we've seemed to have solved my problem, or
Speaker 1: at least we will in the next couple of years,
Speaker 1: and I can get my guilt free shower soon enough.
Speaker 1: In the meantime, we looked at these specific countries, these
Speaker 1: archetypes in Europe with the intention that we could extrapolate
Speaker 1: this out across the rest of Europe potentially. Are there
Speaker 1: other commonalities that we can see in other things that
Speaker 1: we think that other countries, maybe in Asia, Africa, even
Speaker 1: North America? What can they take from this report if
Speaker 1: they're not located in Europe, and have they frightening lee
Speaker 1: similar looking grid? So it's coupling. Isn't a European thing. Yes,
Speaker 1: the term might be European at the moment, but electrification
Speaker 1: more broadly can happen anywhere, but it would have different
Speaker 1: permutations and different implications in terms of the policies regard
Speaker 1: to kick start the process itself and to enable that
Speaker 1: set to coupling doesn't have a detrimental impact on the
Speaker 1: power system. I think anywhere that sort of seriously thinking
Speaker 1: about getting to net zero needs to think about this topic.
Speaker 1: A good example of New York State where they now
Speaker 1: have this Green New Deal that's targeting carbon neutrality. By
Speaker 1: New York looks a bit like some of our Northern
Speaker 1: European archetypes because it gets cold, so they have heating demand,
Speaker 1: they have some industrial demand, etcetera. So it's not a
Speaker 1: bad proxy, and they are funding about seven billion dollars
Speaker 1: over the current five year period for energy efficiency measures
Speaker 1: in buildings, including heat pumps, including electrification, but also just
Speaker 1: making those buildings more efficient. We did look at a
Speaker 1: Southern European archetype, which is a bit different because it
Speaker 1: doesn't get cold, and actually what we found was some
Speaker 1: of the elements are a bit easier because if you've
Speaker 1: got less heating demand, first of all, you don't have
Speaker 1: as much of this sort of flexibility problem in the winter.
Speaker 1: You've also got seasonal balance because you've got more air
Speaker 1: conditioning demand, which manifests in the summer, so actually it
Speaker 1: could be more economically favorable, you know, this sort of
Speaker 1: transition that we're talking about in southern latitudes. So before
Speaker 1: we wrap up, which of the subsectors of transport buildings
Speaker 1: in industry do you most want to see really succeed,
Speaker 1: Because I'm telling you right now you know that it's
Speaker 1: the water boiler issue for me. I think I would
Speaker 1: like the hardest to a boat sector for me is cement.
Speaker 1: It's got really long asset lives for various reasons. It's
Speaker 1: difficult to use the harmon capture and storage and to
Speaker 1: introduce green hydrogen. It also accounts for a large shared
Speaker 1: energy consumption within Europe. So I'm going to go with cement.
Speaker 1: I was actually going to go with buildings for the
Speaker 1: same reason, but just with a slightly different take, because
Speaker 1: I think some of these things are going to be
Speaker 1: easier than other thing. Evis are becoming quite sexy. I
Speaker 1: think people want them. Buildings are almost the elephant in
Speaker 1: the room that if you're serious about net zero as
Speaker 1: a policymaker for me, the way that you show that
Speaker 1: you're serious as you really get to grips with the
Speaker 1: buildings issues, particularly northern Europe, because it's difficult. We've got
Speaker 1: drafty buildings, You've got millions of them that are owned
Speaker 1: by different people that don't that sometimes don't live in them.
Speaker 1: It's such a thorny problem and I think if we
Speaker 1: can crack that, it means we're on our way. So
Speaker 1: in order to get there, now, what would you guys
Speaker 1: recommend as the most impactful policy recommendation that you could make?
Speaker 1: So for me, one of the surprising things was the
Speaker 1: increasing importance of the men on the street. We've seen
Speaker 1: in various countries across Europe there have been increasing public
Speaker 1: opposition to new wind and solar plants, particularly wind. But
Speaker 1: if we want to have a green sector coupling, we
Speaker 1: need more wind and solar plants and we need them
Speaker 1: to actually be able to be built. Likewise, with these,
Speaker 1: we need to be able to reinforce the transmission grade,
Speaker 1: so we need to be able to build some of
Speaker 1: that not underground because that's incredibly expensive. And we also
Speaker 1: need for the man on the street to be able
Speaker 1: to choose the right electricity to tariffs so that they
Speaker 1: respond to price so they can change so they don't
Speaker 1: all want to change their e V at exactive same
Speaker 1: time as they want to use the heat pump. So
Speaker 1: for me, it's policies to get the man on the
Speaker 1: street on board. Okay, So maybe it's just education. To
Speaker 1: be honest, I think we might need a bit more,
Speaker 1: a little bit more than a kick, Okay. So not
Speaker 1: everybody finds wind turbines as beautiful as I do. No, Sadly,
Speaker 1: I think we might need at least some financial incentive, Okay, Albert.
Speaker 1: So in the report we go through sort of what
Speaker 1: do we need to do on market design, what do
Speaker 1: we need to do on sector integration, etcetera. I'm going
Speaker 1: to zoom right back out and just say in the end,
Speaker 1: this is really about decarbonization, and none of this happens
Speaker 1: unless they are real, long, last incredible incentives um and
Speaker 1: regulations and mandates and so on to decarbonize these hard
Speaker 1: sectors what be at buildings, steel, etcetera. And we say
Speaker 1: in the report, in this Northern European archetype, we could
Speaker 1: electrify fift these sectors by It kind of doesn't matter
Speaker 1: if we're right or wrong about those numbers, because if
Speaker 1: we put in place the incentives to decarbonize, whether it's
Speaker 1: through electrification or through other means, that's really the key thing.
Speaker 1: So we might be slightly wrong on the margins of
Speaker 1: how much gets electrified, is how much it's still gas
Speaker 1: and so on. That doesn't matter, but we just need
Speaker 1: the policies in place. Okay, so viva policy. Let's see that.
Speaker 1: Hopefully I'll come to pass. Vicky and Albert, thank you
Speaker 1: so much for joining us today. Thank you for having us.
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