Mind the energy gap

The ever-lengthening shadow of climate change continues to loom over the debate on the future of global economic growth. Increasingly, however, the twin challenge of energy security is exercising policy-makers and leaders of commerce with equal if not greater vigour and urgency - and with good reason.

Worldwide, frail and ageing energy infrastructures are buckling under the weight of growing global energy demand and the job of repairing and upgrading these infrastructures carries a whopping price tag: according to consultant Capgemini, the necessary investment required globally is just short of $22,000bn. The global economic slump, meanwhile, has dealt a blow to investment plans which have been scaled back worldwide. "This is not good news. If the investment is not made on time there will be a problem," says Colette Lewiner, head of energy, utilities and chemicals at Capgemini.

The UK offers a pertinent case in point. Underinvestment in the country's rusty energy infrastructure is threatening to dramatically constrain energy supply. By 2015, experts warn, the UK's generating capacity could fall by up to one-third as ageing coal and nuclear power stations are decommissioned. The UK is struggling to meet its highly ambitious renewable energy targets, which were raised again in July, to supply 40% of electricity needs from low-carbon energy by 2020. Even if more renewable energy was being produced, the country's creaking transmission network would not be able to accommodate it: some 17 gigawatts of renewable generating potential awaits access to the UK grid, according to evidence recently submitted to the UK's House of Commons Select Committee for Energy and Climate Change.

In just eight years, UK-wide demand for energy could outstrip supply by 23% at peak times, creating a yawning energy gap. Last November, a Capgemini report warned that shed-loading - engineered rolling blackouts designed to alleviate pressure on the local grid - and brownouts, a fall in voltage, could become commonplace in the UK by 2015. Elsewhere in the developed world, particularly New Zealand and the US, this worrying prospect is rapidly becoming a reality.

Growing scarcity of fossil fuels and all-round lack of energy self-sufficiency also exposes many developed countries to rising geopolitical risk: Europe is now a net importer of gas and only three Organisation for Economic Co-operation and Development (OECD) economies are net exporters of energy. The International Energy Agency estimates that oil and gas import dependency will reach 65% and 41%, respectively, for the OECD group by 2030. Much of this imported energy is controlled by countries that are either unstable or unfriendly to Western governments.

Logistically, the picture is also becoming more complex. Progressively more fuel is being extracted from under the sea, while pipelines are growing longer and passing through increasingly unstable territories. According to research undertaken by insurance provider Lloyds last year, 30% of business leaders are concerned about their company's exposure to collateral damage caused by an indirect attack, or the impact of political violence, on energy supply lines. Typically, this collateral damage is felt in the form of painful price spikes: in 2008, global energy prices reached record highs. Although this inflation has recently reversed, fossil fuel energy prices are on an interminable upwards trajectory. Global energy demand, meanwhile, is moving in the same direction: a window of risk is opening up, and fast.

Taking control

For the global business community, this has become a serious commercial threat. In response, a number of major corporates have begun exploring and developing innovative, technology-led strategies by which to ensure the reliability of their energy supplies and to take control of ballooning energy costs. While energy efficiency plays an increasingly important role in corporate sustainability policies, a growing number of institutions are beginning to develop their own on-site generation capability. The majority of this activity exploits clean or renewable energy resources, with solar power, wind power, and the use of combined heat and power technologies growing increasingly popular.

The most energy-intensive users, such as big industrials, have stood at the forefront of such activity. Financial services firms are catching up, however. The increasing automation of banking operations, combined with the relentless accumulation of digital information, characteristic of the financial services industry, is driving the development of ever energy-hungry IT infrastructures. Data centres, of which banks are major proprietors, now account for more than 1% of energy consumption worldwide. In over-concentrated locations such as London, sourcing adequate power for such facilities is already a major problem, says Steve Wallage, managing director at data centre analyst BroadGroup.

Although all banks operate rigorous business continuity plans for occasional power failures, frequent switch-over to back-up power generators, which typically run on fossil fuels, is risky and unsustainable. As existing energy supplies and infrastructures globally grow more vulnerable, banks confront new long-term commercial risks. Energy security has become an "enormous issue for banks", says Francis Sullivan, sustainability director at HSBC. "Continuity of supply is absolutely critical and it is not just to do with bigger questions of price and availability of fossil fuels: it is also to do with the quality of power. Self-generation is going to be very much about that continuity of power," he adds.

Early mover

HSBC is one of a handful of banks that have taken the first steps towards self-generation. The bank is exploring a number of renewable energy projects at its sites globally, with the major focus being wind and solar. So far, solar power, which the bank uses to heat water at one of its UK locations, has proved the most successful. Its biggest solar programme has involved the installation of photovoltaic solar arrays, a type of solar panel which generates electricity rather than heat, on a number of the bank's buildings located in North and Latin America. HSBC also boasts the biggest solar array of any London-based facility, according to Mr Sullivan, which provides electricity for the building's lights and air-conditioning.

Citi has also had some success with photovoltaics in its campus locations, particularly in North America. The bank's most impressive projects, however, involve the use of tri-generation techniques, whereby power installations generate power, heat and cooling. "The bank is currently evaluating a number of projects, one of which would be a tri-generation scheme for one of our major data centres where we would move to an on-site generation capability," says John Killey, head of Citi realty services for Europe, the Middle East and Africa. The installation would use the waste heat generated by the electricity production in absorption chillers, which are then used to provide cooling for the data centre. "Tri-generation suits relatively big sites that can take power at a high level and that have a requirement for cooling," he adds. Citi is evaluating a tri-generation plant in Europe, following a similar successful scheme that the bank runs in Northern Ireland. "The big advantage of these projects is that they are not just beneficial from an environmental point of view: it gives us cost benefit and it also adds to the overall reliability of our installations," says Mr Killey. "We are very aware of the fact that there is going to be an energy gap as we go forward," he adds.

In such instances, the bank will directly use the power generated by the on-site installation to run its immediate operations. But energy providers in the US, and increasingly in the UK, are also pushing to deploy a proactive 'demand-side management' model, in which the end grid-user plays a role in managing their own demand on the grid. In a written statement, a spokesperson for energy giant E.ON said that, in the UK, this model might involve paying customers who reduce demand at peak times or who install generation capable of operating with certainty at key times of the day.

Examples of this model can be found in the US, where the use of thermal storage technologies to reduce peak-time grid usage is growing commonplace, says Jason Schafer, senior analyst at Tier1 Research, an IT infrastructure analyst. Using a medium such as ice or ammonia pellets, large energy users store energy, in the cold form, during non-peak hours. This is subsequently used for cooling, reducing or eliminating chiller operation during peak demand periods. In some regions of North America, thermal storage is mandatory, although the customer typically receives credits or discounts on their regular utility supply. Under other schemes, providers of self-generating technologies may also receive certain exemptions or rebates by selling energy back to the grid.

A technical hitch

Efforts are evidently under way to develop a more secure and sustainable on-site energy supply. It is clear, however, that the technologies are proving troublesome to master. Wind power, which is the cheapest source of renewable power and the most widely promoted under government policies, has been a disappointment. Citi's foray into small-scale wind turbines, which require low-velocity wind speed to function effectively, has largely been unsuccessful due to the tremendous updraft created by the bank's tall buildings. HSBC's Mr Sullivan tells a similar story. "The main problem is that in an urban environment, where most buildings are located, wind is changeable and unpredictable and most small wind turbines don't generate very much power," he says.

Larger-scale wind turbines are also problematic. Data centre provider Fujitsu Services has explored development of large-scale wind turbines on a number of its sites. It has also run into problems - some less foreseeable than others: at one site, the turbines threatened to disrupt local microwave links. The technology to store renewable energy also remains highly underdeveloped, meaning that the consistency of supply is still not guaranteed.

Cost is also a critical issue. In the US, microgeneration projects can receive a government subsidy of up to 40%, but even then such projects offer a seven-year return on investment (ROI), says Mr Schafer. Without such subsidies, the ROI would stretch to more than a decade, rendering them unfeasible. For this reason, institutions often defer projects until the necessary government incentive schemes are put in place.

As these challenges demonstrate, localised microgeneration technologies are simply not yet mature, robust or cost-efficient enough to address urgent energy security needs, particularly in developing countries where energy infrastructures are struggling to keep pace with economic development. In some locations, banks have had to resort to fossil-based fuels to secure their local energy needs.

Take South Africa, for example, where load-shedding is a persistent problem. The country's largest retail bank, Absa, which is majority-owned by Barclays, is taking drastic steps to reduce its dependence on the country's highly unreliable coal-fired energy infrastructure. The bank is currently installing its own gas-powered 'energy centre', scheduled to go live in May 2010, which will effectively disconnect the bank from the local grid, "providing mission-critical energy security", says Vedant Walia, sustainability manager at Barclays. Powered by liquefied petroleum gas, the installation will generate electricity for all eight of the retail bank's campus buildings in Johannesburg's city centre, with waste heat reused to heat and cool the buildings. As coal-fired electricity in South Africa is twice as dirty as that generated in the UK, the facility will still halve the retail bank's carbon footprint.

Barclays also anticipates that India, another energy-constrained country, will become an appealing location for solar investments as the government is poised to introduce renewables incentive schemes. Since load-shedding is also commonplace in the country's vibrant economic hubs, most notably Bangalore, solar power could prove a useful source of back-up power, says Mr Walia. But as with all such projects currently in production, small-scale solar energy is simply not dense enough to fulfil the needs of large financial institutions with critical energy-intensive operations. Where renewable energy is concerned, says Mr Walia, "you need to be able to generate to scale".

Thinking big

Small-scale, on-site microgeneration may provide useful supplementary power and, since such power is frequently renewable, a source of positive publicity. But in order to develop a truly robust, sustainable and, most importantly, economically feasible energy strategy, it is clear that banks need to think, if not big, then at least bigger. This means exploiting their infrastructure and project-finance capability to promote generation projects that will directly serve their own immediate operational needs. Morgan Stanley offers one of the most ambitious examples of this type of emerging activity.

In October last year, the bank unveiled a plan to build a colossal $400m UK-based onshore but off-grid data centre powered by tidal energy. Working with Atlantis Resources Corporation, a developer of tidal current turbines in which the bank owns a majority stake, Morgan Stanley proposes to install an array of tidal turbines in Scottish waters, marking the largest tidal energy project globally. The visionary data centre would require about 150 megawatt hours of power, equivalent to the power required to run a small European city. In its initial phases, the installation would take electricity off the local grid, after which it would migrate onto tidal power connected by a dedicated cable, also funded by Morgan Stanley. By building a private cable, the bank will circumvent the UK's creaky transmission infrastructure, and with it the biggest ongoing obstacle to realising large-scale renewable projects.

Futuristic as it sounds, and indeed still is, Morgan Stanley's vision is not entirely original. Last September, it was revealed that search engine giant Google, operator of some of the world's largest data centres, may be planning a similar installation. According to a patent filed by the company, Google has designed a 'water-based' data centre which would use wave-generated energy to power and cool servers located on a ship or container anchored offshore.

Although not as radical as Google's vision, Morgan Stanley's project is not without its risks. The world's first tidal-powered turbine was only brought online in Northern Ireland a year ago after more than a decade in development. Morgan Stanley hopes, perhaps somewhat ambitiously, to have the first series of tidal blades operational by 2011, even though the bank will also have to wait to procure planning permission and potentially regulatory approval.

It remains unclear as to what extent the bank plans to use the data centre space for its own IT operations and to what extent the utility will be leased to third parties. Given its low-latency requirements as a trading powerhouse, it seems unlikely that Morgan Stanley would locate the majority of its own servers in Scotland, although some applications may be housed there. Since the premium on UK data centre space remains high, leasing the majority of the utility to third parties would reap a faster ROI than any operational savings the bank may derive from moving its own servers to the new utility. Morgan Stanley had not responded to queries on this and other issues at the time of going to press.

Purchase power

In recent years, many banks have been highly active in financing renewables and clean energy projects. Increasingly, however, banks are exploring and negotiating deals in which the energy generated from the project in question will be directly supplied to the bank involved at long-term preferential rates.

Barclays is a case in point. The bank is leveraging its renewable finance business to negotiate favourable power-purchase agreements, says Mr Walia. "If we are a finance provider we'll also be one of the principal off-takers, which will allow us to invest increasingly in the UK's renewable energy capacity but also fulfil our needs." The bank is exploring investments in a wide range of renewables, but the primary focus will be mature technologies including wind, geothermal, and solar. Mr Walia believes that renewable finance projects focusing on independent generators that include preferential power-purchase agreements will ultimately be "more important for huge energy users" than small-scale, on-site generation.

The Carbon Reduction Commitment (CRC), due to come into effect in April next year, will also encourage more dynamic arrangements. Under the CRC, the purchase of green power from a utility supplier will not count as 'green' energy. Rather, organisations will have to prove that they have increased the total amount of renewable energy produced in the UK. This will force companies to review their energy-purchase strategy and become more creative in the types of financing arrangements and purchasing agreements they enter into. Citi is also exploring innovative energy-procurement arrangements with local third-party suppliers, in which the upfront infrastructure costs may be borne by the bank. "First and foremost, these projects must be economically feasible," says Christian Maglioano, senior vice-president for the global sustainability group of Citi realty services. "But they have the potential to not only offset our emissions but to hedge ourselves well against oil prices, and against utility rate structure increases."

In recent evidence given to the UK's House of Commons Select Committee for Energy and Climate Change, Dr Michael Pollitt of the electricity policy research group at the University of Cambridge, described this type of activity as an "unexploited opportunity". Investment in localised technologies and the development of decentralised energy resources through private-private partnerships are, he added, "the sorts of experiments we should be doing now because they may pay off very substantially later on". But, "no one pretends it is easy", he added. Indeed, as E.ON acknowledges, the transmission infrastructure in the UK - and elsewhere for that matter - will have to be decentralised and made more flexible through new 'smart' micro-electronic technologies if a truly dynamic energy infrastructure is to be realised.

The new models, both financial and technological, required to successfully source and secure energy at an on-site and local level are still in their infancy, and many projects may yet falter. Building the beginnings of a diverse energy infrastructure is critical, however, if large, energy-hungry organisations are to buffer themselves against the vagaries of future geopolitical shocks, price spikes, and the dangers associated with lengthening supply chains.

But governments, power providers and users will have to act in partnership, says HSBC's Mr Sullivan. "We need to work together to make sure that we have consistency of supply, that we de-carbonise that supply and that the price is still affordable: otherwise we'll see companies effectively isolate themselves from supply."