The Energy Equation
S+B: When you talked about these investments in your speech to the International Energy Forum, you spoke of an “energy equation” of four interrelated moves that a large-scale, global energy company — or maybe an alliance of energy companies — should make. What are the four parts of the equation, and why those four?
CONTI: The first is helping to establish a transparent and efficient global market with a stable and symmetric regulatory framework. If you want to serve the growing demand for energy in places like Asia, Latin America, and the Africa of the future, you have to keep investing in long-term energy abundance. And to keep investing, energy companies have to have not only the right framework of regulation, but strong and reliable cash flows.
In Europe, the liberalization process has been most effective in the United Kingdom and Italy. In Italy, we’ve seen firsthand how a competitive market can boost investment and improve energy security and efficiency. All the generation companies and power operators have access to the market through the transmission networks; as the former incumbent power company, Enel has seen its market share reduced to about 30 percent. And about 30 gigawatts of incremental generation capacity, both greenfield and brownfield, have been installed. Italian generation technology is among the most advanced in Europe, and our company has kept energy prices relatively low, notwithstanding the growth in fuel prices (mostly gas). From 1996 to 2006, the generation costs attributable to fuel prices grew 150 percent, whereas the average electricity cost increased only 20 percent.
But Europe is not an integrated energy market yet. To achieve integration, it will be necessary to create a level playing field. We’ll need harmonious regulations across the electricity and gas sectors; rules aligned with European best practices; improved interconnections among electricity transport networks; and a coordinated network of independent transmission system operators (TSOs), which are the companies that oversee the transportation of electricity from power plants to local distribution. The coordination of TSOs will be crucial for electric system security, for example, to prevent more blackouts like those in Germany in 2006 or in Italy and North America in 2003. At the same time, TSOs need to remain independent, to maintain competition.
The second part of the equation is sustainability.
S+B: Environmental sustainability?
CONTI: Yes, but also the ability to continue to operate as a power supplier over time. Old-fashioned fossil fuels will continue to provide 80 to 90 percent of the total demand for the immediate future. And bear in mind that we expect at least 55 percent growth in worldwide energy consumption over the next 15 to 20 years. That growth in itself will require massive investments; some industry observers estimate it will take between $20 trillion and $30 trillion to provide that much energy.
This means that if we are not innovative in our projects, we will jam the planet with carbon emissions. For a company like Enel, sustainability means continuing to operate with the older carbon-based fuels on the one hand, while on the other hand, innovating with technologies that favor low emissions or no emissions. Some of these technologies would allow us to continue using coal, crude oil, and other fossil fuels such as methane or liquid natural gas with dramatically reduced or even no carbon emissions.
Innovation is the third part of the energy equation. As energy providers, we want the lowest cost possible for consumers. How can we do all these things — increase our scale, provide sustainable energy, and lower costs — if we don’t invest in innovation and efficiency?