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To Hit COP21 Goals, Competition More than Innovation Is Required

Posted by Cosmin Laslau on Nov 23, 2015 12:31:46 PM

In December, top government leaders from around the world will negotiate in Paris for almost two weeks to try to tackle climate change. The 2015 United Nations Climate Change Conference (a.k.a. COP21) is focused on trying to pin down some type of agreement between all the nations of the world, for how to limit global warming so the world heats up by no more than 2 ⁰C. This will be no easy task. The last attempt at such an agreement was in Copenhagen in 2009, and it failed to make any real commitments.

It will take a staggering effort to limit warming to 2 ⁰C. The world’s biggest emitters of greenhouse gases, like China, the U.S., and the E.U., will probably have to reduce their emissions by 80% within three decades. They, and other countries, must still further cut emissions in the foreseeable future. In the face of such huge challenges, some are pinning their hopes on disruptive innovations and are pouring money into early-stage ideas for energy breakthroughs – Bill Gates, for example, is putting $1 billion of his fortune in such efforts.

Such investment moves are admirable, and should continue, but the pace of truly disruptive innovation and its scale-up and commercialization is slow. For example, it took solar 40 years in the market to start becoming cost-competitive with some fossil fuels (in certain regions of the world). Lithium-ion batteries, now 25 years since their commercialization, are still not ready to help to seriously disrupt fossil fuels. In short, it’s unlikely that a new breakthrough will be discovered in the coming years that will solve climate change in time. Instead, we will have to make do with the building blocks we already have. Those include solar, wind, batteries, and a suite of smart software and hardware that loosely makes up the Internet of Things for energy.

Global competition is key to making the most of such building blocks. For example, European developers were undercut by China in solar, while the U.S. was beat to the punch in batteries by South Korea and Japan. Globally, the impact was good - solar and batteries have become dramatically cheaper and costs continue to fall. Eventually, even the losers find a way to get back-up. After years of disastrous bankruptcies for U. S.-based battery developers, the country has now rebounded, with the Nevada-based Tesla Gigafactory poised to be the world’s biggest maker of energy storage. The more that governments at COP21 can enable this sort of brutal global competition in renewable energy between corporations, the better.

However, today there remain many barriers to competition in the energy industry. This is a critical issue that is emerging as conventional energy begins to come under threat from distributed generation and renewables. Distributed generation is simply the pairing of the aforementioned innovations, like solar plus batteries and clever software that enables businesses and individuals to make their energy on-site (often renewably), rather than getting it from a centralized power plant running on fossil fuels.

In the long-term, distributed generation will either kill centralized utilities altogether, or greatly diminish their revenues from power generation. Predictably, the incumbents are reacting to distributed generation in one of two ways. A few utilities want to embrace this change but are unsure how, however most utilities are simply fighting to resist this change in any way possible to preserve the status quo. An early preview is already playing out in the courts today - the U.S. Supreme Court is currently debating FERC 745, in a case where power industry incumbents sued the regulator over the innovation of demand response. It is the first of many more such battles.

This upcoming conflict of 21st century energy generation has a useful historical precedent. For most of the 20th century, telecommunications were often run as national monopolies. Eventually, they were struck down by lawsuits and other gradual changes, opening up more competition, better pricing, and innovation. Energy will undergo a similar transformation, away from a handful of centralized providers in each region, towards a diverse, innovative, competitive landscape of distributed generation. Today, utilities enjoy a lot of protection, for understandable reasons – they provide a crucial function, employ many, and are often viewed as national champions worth saving. However, reducing that protection is a crucial step to give COP21 the best shot at limiting global warming.

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