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Increasing Global Electrification Offers Growth Opportunity For Power Utilities

Bar chart showing the total number of connected devices 2015-2025 (estimate) (in billions of connected devices). In 2015, the number of active connected devices amounted to nearly 14 billion. By 2025, this is expected to grow to over 34 billion, with non-IoT devices (which includes all mobile phones, laptops, tablets , PCs and fixed line phones) amounting to 12.7 billion connected devices and IoT devices (which includes all B2B devices) amounting to 21.5 billion connected devices.

Promising growth opportunities for power utilities as increasing global electrification as a result of rising electricity penetration and usage in emerging markets, greater usage of technologies such as IoT and AI, and the electrification of the transport sector could propel electricity demand in the long term.

Global electricity demand could be set to increase in the long term driven by rising electric vehicle ownership, data centers, and economic growth in emerging markets which could help offset drags to electricity demand from energy efficiency which faces diminishing returns.  According to analysis from Bloomber NEF, global electricity demand is expected to increase 57% by 2050, reaching around 38,700 terawatt-hours from 25,000 terawatt-hours in 2017 driving new investment in power generating capacity. Meanwhile Norway-based quality assurance and risk management company DNV GL foresees electricity’s share of the global energy mix to more than double to 45% in 2050.

The Information Technology Revolution

The Information and Communications Technology (ICT) revolution is electricity intensive, with approximately 3%-5% of the world’s electricity in 2015 being consumed by the ICT technology sector, according to a research paper published by Swedish researcher Anders Andrae, mostly through huge power-hungry data centers (also known as ‘server farms’). Without dramatic increases in efficiency, the communications industry is expected to use 20% of the world’s electricity by 2020 according to Anders Andrae as more people come online, and technologies such as smartphones, cloud computing and the Internet of Things (IoT), which require computer power, play an increasingly pivotal role in an increasingly digitized world.

A 2018 report by Hootsuite and We Are Social found that in 2017 about 4 billion people around the world use the internet (a 7% increase compared to 2016), with nearly a quarter of a billion people coming online for the first time in 2017. Africa saw the highest growth rate with the number of internet users across the continent increasing by more than 20%, driven by affordable smartphones and data plans. But that leaves a little less than half of the world’s nearly eight billion people without access to internet, and as they come online in the future, electricity demand should increase in tandem. US researchers expect power consumption to triple in the next five years as one billion more people come online in developing countries, and technologies such as Internet of Things (IoT), Artificial Intelligence, driverless cars, and robots, grow in usage in developed nations.

While the emergence of the Internet of Things (a system which connects everyday things such as cars and home appliances to the internet enabling them to collect and share data), could potentially offer energy saving opportunities (as the data generated from these IoT devices could be used to devise energy saving technologies, and energy saving programs to reduce energy demand), it is not clear whether these would be enough to offset the increase in electricity usage from the proliferation of billions of electricity-powered IoT devices worldwide as well as the electricity-powered data centers necessary to analyze and store the data generated from these IoT devices. The sheer number of active IoT devices expected to be in use in the future far exceeds the number of smartphones, and tablets used currently; IoT Analytics reports that the number of connected things (or IoT devices) in use worldwide has reached 7 billion in 2018, and this is expected to triple to 21.5 billion devices by 2025, which is about twice the number of non-IoT devices (i.e., smartphones, laptops, tablets etc) in use in 2018.

Bar chart showing the total number of connected devices 2015-2025 (estimate) (in billions of connected devices). In 2015, the number of active connected devices amounted to nearly 14 billion. By 2025, this is expected to grow to over 34 billion, with non-IoT devices (which includes all mobile phones, laptops, tablets , PCs and fixed line phones) amounting to 12.7 billion connected devices and IoT devices (which includes all B2B devices) amounting to 21.5 billion connected devices.

While some IoT devices such as sensors may use fractional amounts of electricity, others such as connected vehicles for instance, consume considerably greater amounts of electricity. And it is not just the physical devices themselves that require electricity to operate, but also the bi-directional data transfer between IoT devices, and servers in the network; according to figures from Roger Nichols, 5g Program Manager at Keysight Technologies, it takes approximately 2kWh to download one Gigabyte of data over the internet (which is equivalent to using a 2000watt steam iron continuously for an hour). Meanwhile a 2012 paper by EnerNOC Utility Solutions found that it takes about 5.12 kWh to download one Gigabyte of data with data centers accounting for 48% of the power consumed, end users accounting for 38% and the transport network accounting for the balance 14%.

Pie chart showing the energy usage breakdown to download one Gigabyte of data over the internet (in kWh per GB). The total energy required to download one GB of data is about 5 kWh per GB, with data centers accounting for 48% (equal to 2.47 kWh), end users accounting for 38% (1.96 kWh) and transportation accounting for the balance 14% (0.70 kWh).

Similar to IoT, the rapid rise of Artificial Intelligence could help reduce power consumption in certain cases; for instance, Google is reportedly using DeepMind AI to reduce energy consumption in its data centers by as much as 30%. However, as AI technologies increasingly permeate important sectors like healthcare, communication, transport, business, finance, and education, it remains to be seen whether this could offset higher power consumption as a result of the greater usage of AI-powered devices (from low-power devices such as voice-operated AI assistants such as Amazon Echo, and Google Home, to relatively high-power machines such as autonomous cars), and increased data center workloads to process and store the massive data volumes (the raw material of AI) required for these AI solutions to function. According to a publication by Seagate, the amount of data created worldwide will grow to 163 zettabytes (ZB) by 2025, which is ten times the amount produced in 2017. The report also reveals that by 2025, 75% of the population will be connected, creating and interacting with data. Meanwhile, IDC expects that the “average rate per capita of data-driven interactions per day is expected to increase 20-fold in the next decade as our homes, workplaces, appliances, vehicles, wearables, and implants become data enabled”. A self-driving car for instance, gathers and analyzes tremendous quantities of data about the environment to navigate and drive the vehicle. This requires massive computing power which in turn is drawn from huge amounts of electricity. According to auto parts supplier BorgWarner Inc, some of today’s prototypes for fully autonomous vehicles consume two to four kilowatts of electricity – which is equivalent to the energy consumed by 50-100 laptops.

Economic growth in emerging markets

In 2017, world electricity demand increased 3.1% or 780 TWh significantly higher than the overall increase in world energy demand according to figures from the International Energy Agency (IEA). China and India together accounted for 70% of this growth while another 10% came from other emerging economies in Asia, largely due to rapid economic growth. In China, electricity demand grew 6% (or 360 TWh) on the back of a roaring economy which grew 7%, while India saw electricity demand rise 12% (or 180 TWh), far outpacing the country’s GDP growth rate of 7% for the year 2017.

Yet, there is still ample potential for growth. Although electricity penetration is 100% in China (the world’s largest electricity producer) according to the World Bank, electricity per capita stands at just 4.28 MWh per person, considerably lower than Canada (14.84 MWh per person), the United States (12.83 MWh per person), Oman (7.00 MWh per person), and Russia (6.71 MWh per person) as of 2016 according to figures from the IEA.

Bar chart showing the electricity consumption per capita, top 15 countries, 2016 (MWh per person). Iceland had the highest electricity consumption per capita at 53.91 MWh per person, followed by Norway (23.69 MWh per person), Bahrain (19.51 MWh per person), Qatar (15.48 MWh per person), Finland (15.47 MWh per person), Kuwait (15.28 MWh per person), Canada (14.84 MWh per person), Luxembourg (14.27 MWh per person), Sweden (13.76 MWh per person), United Arab Emirates (13.05 MWh per person), United States (12.83 MWh per person), Chinese Taipei (10.88 MWh per person), Korea (10.62 MWh per person), Australia (9.91 MWh per person), and Saudi Arabia (9.82 MWh per person) according to data from the International Energy Agency .

Bar chart showing the electricity consumption per capita, 2016, for selected emerging markets (MWh per person). Russia’s per capita electricity consumption is one of the highest  among emerging markets at 6.71 MWh per person, followed by Malaysia (4.66 MWh per person), China (4.28 MWh per person),Chile (4.18 MWh per person),Hungary (4.18 MWh per person), South Africa (4.03 MWh per person), Turkey (3.11 MWh per person), Thailand (2.87 MWh per person), Brazil (2.5 MWh per person), Mexico (2.29 MWh per person), Egypt (1.78 MWh per person), Peru (1.46 MWh per person), Colombia (1.44 MWh per person), India (0.92 MWh per person), Indonesia (0.87 MWh per person), and the Philippines (0.8 MWh per person) according to data from the International Energy Agency.

Thus, electricity demand from the Middle Kingdom will come from increased electrification of the economy such as transport (by 2040, the IEA expects about 25% of vehicles on Chinese roads are expected to be electric, up from less than 10% in 2018), and consumption (the IEA foresees that by 2040, the average Chinese household will consume nearly twice as much electricity as today), and manufacturing which, at 4,441 TWh accounted for 70% – the biggest share – of China’s electricity consumption in 2017 according to statistics from China’s National Energy Administration.

Pie chart showing China’s electricity consumption by sector in 2017 (in GWh and % of total electricity consumption). At 4,441,300 GWh (equivalent to 70%), China’s secondary industry accounted for the biggest share of the country’s electricity consumption in 2017. Tertiary industry consumed 881,400 GWh (14%), households consumed 869,500 GWh (14%) and primary industry consumed 115,500 GWh (2%) according to data from the China National Energy Administration.

In the manufacturing sector, rising electrification of energy-intensive industries such as food and beverage, glass, pulp and paper, steel, and chemicals in the long run partly in response to the Chinese government’s aim to reduce greenhouse gas emissions, and the country’s rise up the manufacturing value-chain by adopting industrial robotics and other technologies requiring electricity such as cloud computing, AI and IoT as part of its “Made in China 2025” strategy, could propel electricity demand from China’s manufacturing sector, in what has been an ongoing trend; according to the IEA, China’s industrial sector electricity demand has increased approximately 9% annually, outpacing demand growth for all other fuels, pushing up electricity’s share of industrial energy consumption from about 10% in 1992 to 18% by 2012.

Meanwhile India (already the world’s third biggest producer and consumer of electricity behind the United States and China), is poised to emerge as a major growth driver for global electricity demand with the country’s electricity penetration at 84.5% as at 2016 according to data from the World Bank, leaving about 15% or 150 million of the country’s one plus billion citizens, most of whom are located in rural areas, without access to electricity – which would rank it among the world’s top ten most populous countries if Indians living without electricity were an independent country. Furthermore, India’s per capita electricity consumption is one of the lowest among emerging markets at just 0.92 MWh per person in 2016, which is lower than Peru (1.46 MWh per person), Egypt (1.78 MWH per person), and Mexico (2.29 MWh per person) according to IEA data.

The Indian government’s ambitious US$ 2.5 billion plan (known as the “Saubhagya scheme”) to electrify all Indian households has helped push up the country’s electricity penetration rate since the plan was announced in 2015, however with millions of Indians still lacking access to electricity, there is potential for further growth in electricity demand in the long run as these Indians gradually get connected to the grid.

India’s power consumption is expected to more than quadruple by 2035-2036 driven by increasing electricity penetration, industrial expansion, and greater economic growth which will contribute to rising per capita income which in turn will push consumption of electric appliances such as air-conditioners as consumer incomes increase.

Electrification of the transport sector worldwide

Accounting for about 27% (equal to about 25 million barrels per day) of 2016 global oil consumption (estimated at 94 million barrels per day), the road transport sector is the single biggest consumer of oil according to data from the International Energy Agency.

Pie chart showing global oil demand by sector, 2016 (% share). At 27%, the Passenger Vehicle sector accounted for the biggest share of global oil consumption in 2016, followed by Freight (17%), Petchem Feedstocks (12%), Other (12%),  Buildings (8%), Aviation (6%), Steam & Process Heat (6%), Power Generation (6%), and Maritime (5%) according to data from the International Energy Agency.

However with Internal Combustion Engine (ICE) vehicles being gradually replaced by Electric Vehicles (EVs), the global road transport sector is becoming increasingly electrified which could result in a decline in fossil fuel’s share of global oil demand while electricity demand increases, suggesting a bright future in the long term for power utilities.

Several factors could serve as growth drivers for the electric vehicle industry. Electric vehicles convert about 90% or more of their energy into moving the vehicle and thus due to their low energy loss, electric vehicles are generally viewed as more energy efficient than conventional vehicles which convert a maximum of 35% of their energy into moving the vehicle.

Furthermore, as the impacts of climate change such as global warming become increasingly severe, there is a growing sense of urgency to take steps to mitigate its effects. Renewable energy has been identified as a key solution to tackle climate change and as renewables gradually displace conventional fossil fuels in electricity generation (fossil fuels such as coal, oil and gas currently account for over two-thirds of electricity generation worldwide according to the International Energy Agency), the electrification of the transport sector which could help decarbonize the sector by reducing its dependence on oil, is expected to follow, helped in part by strong policy support (a number of countries such as France and Britain have announced plans to phase out fossil fuel vehicle sales) and falling costs of components such as EV batteries (analysis from Mack Institute show that EV battery costs have declined 16% annually between 2007 and 2017).

This is reflected in optimistic projections for EV numbers going forward. EVs currently make up a small proportion of the global car fleet (as of 2017 just 1.3% of all the vehicles in the world are electric according to analysis from McKinsey), however, their share is rising as EV sales steadily increase.

Bar chart showing global passenger electric vehicle sales from 2012 to 2018 (estimated) (in thousands of units). In 2017, 1.09 million electric vehicles were sold worldwide, up from 695 thousand in 2016, 448 thousand in 2015, 289 thousand in 2014, 206 thousand in 2013 and 122 thousand in 2012 according to data from Bloomberg New Energy Finance. For 2018, electric vehicle sales are estimated to be 1.59 million.

Consequently, EV’s share of the global car fleet is expected to grow in the next two decades. According to the International Energy Agency (IEA), just about 3.1 million passenger vehicles were electric in 2017, and this is expected to increase to 125 million by 2030. Meanwhile forecasts by DNL GL reveal that by 2042, half of the world’s fleet of road vehicles – light and heavy will be electric. Projections from BloombergNEF echo a similar view; by 2040, EVs are expected to make up 55% of new car sales and the total number of EVs is expected to reach 559 million, equal to 33% of the global car fleet.

As EVs displace fossil fuel-powered ICE vehicles in the years ahead, this opens a potential growth opportunity for power utilities as the transport sector’s oil demand is replaced with electricity. The International Energy Agency foresees oil demand being cut by 3.3 million barrels per day by 2040 thanks to a projected 300 million EVs on the road. According to BloombergNEF, EVs displaced 17.8 thousand barrels of oil per day as of the end of 2016. Going forward BloombergNEF expects electrified buses and cars will displace a combined 7.3 million barrels per day of transportation fuel in 2040.

Bar chart showing fuel displaced by EVs on the road (in thousand barrels a day) in between 2011 and 2017 (estimated). 17.8 thousand barrels of oil were displaced by EVs as of the end of 2016, up from 10.1 thousand barrels per day in 2015, 5.8 thousand barrels per day in 2014, 2.9 thousand barrels per day in 2013, 1.2 thousand barrels per day in 2012 and 0.3 thousand barrels per day in 2011. 28.4 thousand barrels per day are expected to be displaced by EVs in 2018 according to figures from Bloomberg New Energy Finance.

While the rise of EVs serves as a drag to oil demand, the opposite is true for electricity. Electricity demand from EVs worldwide (which is equal to just about 0.2% of total global electricity consumption in 2017) has been increasing over the past few years and this trend is expected to continue as the global EV fleet grows. The IEA estimates global electricity demand from all EVs increased 21% over 2016 to reach about 54 terawatt-hours (TWh) in 2017, an amount which is slightly higher than Greece’s electricity demand.