Full Spectrum: Energy Analysis and Commentary with Jesse Jenkins

A lot can change in the energy sector over the span of a decade. Just ask Randy Zwirn. As President and CEO of Siemens Energy, Inc. and CEO of the Energy Service Division of Siemens AG, Zwirn has to peer into the future every day as he manages the decade-long development cycles typical of the company’s new energy products.

Randy Zwirn, Siemens Energy CEO“If you go back here in the United States just to 2007, I think 135 coal-fired power plants were planned,” Zwrin reminded me, as we sat down for an exclusive interview on the sidelines of the MIT Energy Conference on February 21st.

“The ‘second nuclear renaissance’ was underway back then, and people were concerned that natural gas prices were way to high,” Zwirn noted.

“Now, in a relatively short period of time, well within the ten-year cycle Siemens Energy has to manage for planning, the energy situation has turned around dramatically.”

In the following, lightly edited transcript of our interview, I chat with Zwirn about the major trends shaping the energy landscape, the big opportunities Siemens sees over the coming decade, and the company’s collaborative efforts to develop the new energy technologies needed to power an uncertain future.

Full disclosure: Siemens Energy is a sponsor of TheEnergyCollective.com. Zwirn was a keynote speaker at the MIT Energy Conference and this interview was arranged through the conference’s press team.

Jesse Jenkins for TheEnergyCollective.com: Let’s start with one of the most important forces at work today: the globalization of energy demand and the emergence of developing economies as major consumers of energy.

The International Energy Agency projects that virtually all energy demand growth over the next two decades will come from outside of today’s developed nations, and that by 2035, two thirds of global energy demand will come from outside of the OECD nations.

How do you see these trends changing the global energy marketplace and the positioning for firms like Siemens?

Randy Zwirn, CEO, Siemens Energy: That’s definitely one of the interesting things today for a company like Siemens trying to figure out what are the technologies we need to deliver.

Think about it this way: someone wants to turn their light switch on and they need a utility to provide them with power.

The utility itself probably has a three-year cycle to meet that demand. They’ve got to build a power plant, they’ve got to make bids, and they’ve got to get regulatory approval from their public service commission.

We as Siemens then need to be prepared to bid a technology to the utility that’s efficient and low-cost. And we typically have a seven-year cycle to design a new product.

So when you’re talking about developing new technologies for the power sector, you’re talking about something with a ten-year cycle, from inception of what technology is the right one for a market or a country to when someone flips a switch and is served by that technology.

So we always have to look a decade ahead at the future.

We’re in an interesting environment right now. For example, if you look at the wind industry, the U.S. renews the production tax credit for wind basically every year. And they just let it expire.

So the decisions we have to make, about building factories, designing new products, those are typically long-cycle decisions and investments.

Relating that to your question and getting back to the emerging markets, what is emerging is a picture where the complexity we have to balance is a kind of mix of affordability, definitely for the emerging markets, but now also including sustainability and reliability.

Balancing those three priorities—affordability, sustainability, and reliability—I think, that is really where the challenge is today. 

If we now look out to the emerging markets, to places like China, they have a tremendous amount of power demand. But again, they are facing an unanticipated environmental catastrophe around air pollution from coal generation, which was their affordable solution. But it no longer seems to fit the sustainable solution. I think even China from a policy standpoint is having real problems with that.

So I think all of the markets we are dealing in are struggling with this affordability-sustainability-reliability triangle.

If you ask me what are the key technologies, I believe fossil fuels will still be the backbone of the global energy market for as far out as we can see. But I think renewables will play a bigger role. So, for example, this inter-relationship between renewables and natural gas will be two areas where the largest amount of focus for us will be.

J: So in some ways, it’s not all that different in the emerging economies as for the OECD-type countries, as it’s the same basic set of challenges associated with balancing affordability, sustainability, and reliability?

Z: Right. In some places, the affordability aspects may be more heavily weighed. But, again, if you look at China, coal was clearly the affordable solution, and one can even argue it was the affordable option in the U.S. seven or eight years ago, when we were declaring ourselves the “Saudi Arabia of coal.” But now, this issue of sustainability has really changed that game.

J: Let’s talk a little bit more about the electricity sector in particular.

There has been a lot of talk about the “utility death spiral” recently. Last year in particular, everyone was talking about particularly utilities in Europe facing declining or flat demand growth do to energy efficiency and aging populations and at the same time the rise of distributed generation and renewables competing directly with traditional centralized generators, and even demand response emerging as a new alternative to capacity provided by a gas plant or other peaking power plants.

How do you look at the electricity landscape? Siemens is a global company, but obviously has strong roots in Europe. Is the United States following the same path? Is this really a fundamental shift coming to the electricity sector? Or is this a lot of hype and hot air?

Z: Europe is a difficult market to study and reach a broad conclusion, because what happened was thrown off track by ill-conceived regulations, particularly around renewables.

I think it’s one thing to be sustainable, and it’s another thing to turn the system on its head overnight with uncompetitive feed-in tariffs that completely change the landscape in a very short time—and going back to the affordability topic, doing so in a way that in the long-term is not affordable.

Utilities now have installed assets in Europe that are really money-losers. There’s no way they can be expected to continue to operate their power plants just 500 hours a year while losing huge amount of money because they can’t cover their fixed costs.

So I think maybe we shouldn’t be looking so much at Europe and the events that have happened to utilities there as a universal trend.

I think if you come back to the U.S., we still have 2,000 or 2,500 utilities here. Some of them are very small. So I think we will see a continued consolidation of the industry here in the U.S., because it’s a highly capital-intensive industry. Particularly if in the future, nuclear will be considered an option, then you need large balance sheets to support that industry.

The bulk of the U.S. is still a regulated business. That regulated business, if you look at a place like Florida, still results in a very low cost energy supply and it is able to have a very reliable power system, and meet the sustainability requirement.

So I think the utility context in the U.S. will stay fairly stable. But I think we’ll see more utility mergers and more scale, giving the utilities an ability to deliver services at an even lower cost.

J: Do you see a continued role for nuclear energy and other large, centralized baseload power plants? Or in a world with a lot more renewables and a lot more variability in the output on the grid, is baseload not really a feasible option?

Z: It’s really a difficult call.

Coming back now again to the affordability question: Southern Company has just launched two nuclear plants, and I think the one lesson for the nuclear industry is clearly that the first cost of the plant doesn’t seem to be at the end of the day the final cost of the plant.

So I think those are very important demonstrations. The utility and the contractor need to be able to get the costs right at the end and make those projects successful.

Because if in fact these nuclear projects wind up with big overruns, we will be back to the point where nuclear is a reliable and sustainable technology—it’s zero carbon emissions—but it may not be affordable.

My own opinion is that what I see here in the U.S. is gas and renewables in some combination being dominant.

The mix will depend on the appetite for continuing to subsidize renewables, which again is a social decision balancing those affordability and sustainability dimensions. It’s not a purely economic decision to embark on increasing the percentage of renewable energy.

But I believe gas and renewables—solar and wind—will be the two main technologies that will co-exist in the market here in the United States.

So a lot of what we’re doing on the gas turbine development side isn’t just about building bigger and more efficient turbines, it’s about building turbines that are flexible, that are able to load-follow and deal with the intermittent nature of renewables.

Therefore a lot of the innovation landscape will be actually driven to make the fossil technologies more adaptable to the pattern of intermittent renewables.

J: That’s a great segue to my next question, which is about the innovation side of things.

How does Siemens drive new technology development to prepare for this uncertain future?

Z: In terms of incubating, getting access to, and accelerating the deployment of new technology, partnerships are critically important across the board for Siemens.

There are certain things that are part of our core DNA at Siemens—the design of a turbine blade for example. That’s something that is almost always pure, in house know-how for us.

But then there are other elements of innovation, things like flexibility or cycle time costs, that we look outside for.

Something like 3D printing has incredibly valuable applications to our industry, for reducing the costs of new product cycles, for creating new stronger blade designs and components and for repairs. But 3D printing is not a Siemens core technology. So we look outside for that.

If I look at the different kinds of partnerships we have, let’s start with our post-combustion carbon capture research we do in partnership with MIT. Coal is maybe not the preferred topic, but we have a lot of it, and if we could have sustainable, affordable carbon capture technology, that would make the fossil fuel reserves we have in the West much more valuable.

The U.S. Department of Energy is another big partner of ours. With DOE, Siemens has a carbon capture project in Texas, the Texas Clean Energy Project, where we are trying to demonstrate the capture of 90 percent of carbon emissions from a coal gasification plant. The project is partially funded by DOE using Siemens gasifier technology and using Siemens turbine technology.

On the renewables side, we have a joint program with DOE’s National Renewable Energy Lab, where we’re testing the effect of wind turbulence on wind turbine design. We’ve put in place with NREL a series of full-scale test turbines to test the impact of turbulence on our turbine blades.

J: And what’s the advantage of doing something like that with an outside party like DOE or NREL rather than build your own proprietary test facility given Siemen’s prominent role in the wind space?

Z: First of all, NREL has a view across the entire industry. So they are using Siemens technology to demonstrate this testing, but NREL of course has a broader role in the industry.

So aside from their established know-how and expertise, we also get market access, and access to scientists that have a broader array of knowledge. It brings a much bigger scale of knowledge—and other funding options of course—to us.

If I look at the work we do with universities like MIT, it brings the great resources that MIT has on the engineering side into the game for us on post-combustion capture. So we can build larger scale teams with a bigger experience base.

We have a partnership with the University of North Carolina as well. Our biggest, newest $350 million gas turbine facility is in Charlotte, and we’ve invested there with UNC in a program for accurate measurement in manufacturing technology. The kinds of criteria we have to manufacture to are very very narrow. So we are developing new technology to improve the precision of our advanced manufacturing operations.

Partnering with this strong engineering school right adjacent to where we have our major, state-of-the-art facility makes a lot of sense for us. They are able to be a future sourcing ground for engineers as well as provide us now with access to another pool of great expertise.

As a major company in the energy space, we also have an interest in fostering the energy domain as a major area of work for academic research.

Another example is the University of Central Florida right next to our headquarters in Orlando, where we are working on advanced combustion technology, something critically important in turbine design. That work creates a pool of know-how. It creates a whole curriculum around energy technologies at the school. It becomes not only a source of great students and professors to do research with us but also creates a pool of talent to bring in to our organization.

So we maintain lot’s of different kinds of partnerships, but all of them are focused around gaining scale, know-how, and speeding up the innovation cycle.

J: Dan Yergin kicked off the MIT Energy Conference by taking a look back at what’s changed in the energy landscape across the last nearly ten years since the conference began. Looking forward at the next decade, as you clearly have to do on a daily basis as CEO of Siemens Energy, what do you think are the big trends that you have to stay on top of or keep ahead of?

Z: I think we really started the discussion with it. Whatever we develop today for meeting the needs of energy generation or generation in the future is going to have to solve three challenges at the same time: sustainability, affordability, and reliability.

That’s a moving target. Particularly the sustainability part of it can be heavily influenced by regulators and changing public attitudes.

Again, as recently as seven or eight years ago, we were still talking about being the Saudi Arabia of coal, and now it’s basically impossible to get a new coal plant permitted in the United States.

So there are extremely quick shifting sands.

Yet at the end of the day, we need a reliable and affordable electricity system to supply energy for economic growth here and in emerging markets alike, and we have to keep track of the sustainability priorities as well.

If you ask me, do I see any breakthrough technologies today that are going to change the direction over the next decade, I would have to say no.

Of course, there’s a lot of discussion about electricity storage and storage technologies, and that could be a fairly significant game changer for renewables.

But I would say it’s more about flexibility and cycle times and efficiencies, and getting the existing technologies we have to work better together.

We can also supplement these established technologies with things like 3D printing or Big Data, which is another big priority for us today. We typically look at data vertically, and I think when you look at data vertically even in a very sophisticated way, you miss some of the non-obvious correlations. So Big Data will allow us with some of the existing technologies we have to take fairly significant steps forward in terms of cost, cycle time, and efficiency.

But if you ask me ten years out, I see, for the Western world, gas and renewables as the main action, the market for coal getting narrower and narrower, and nuclear trying to get out from under the shadow of Fukushima and prove that it can be an affordable option.

It’s a very uncertain playing field, but one that still leads me to believe that fossil fuels are still going to be the dominant backbone to meet the world’s energy needs for the foreseeable future.

J: Thanks for speaking with me Mr. Zwirn.

Z: My pleasure.