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(Vox pop sound) Francesco Starace: So the culture of this industry is a culture in which number one, don't make mistakes. Number two and three also. Nobody wants to have mistakes, but you have to accept that they happen. You cannot have innovation if you don't want to have mistakes”
Mark Wiedman: Welcome to The Bid miniseries, The real leaders of net zero, where we talk with CEOs about what they and their companies are doing to move the world to net zero. I'm your host, Mark Wiedman. I'm super excited about our guests for this episode. Francesco Starace, the CEO of Enel, an Italian-based gas and electricity utility that operates in more than 40 countries around the world. Francesco's been with the company for over 20 years and has been an integral leader of the company's ambitious net, zero plans - from creating the Enel Green Power Group back in 2000 to just last year when the company announced it was accelerating its net zero commitment by 10 years from 2050 to 2040.
Why and how ENEL doing it. We'll talk about the transformation of the clean energy market. We'll talk about renewable. And about the role of technology and innovation and failure in the net zero transition.
Francesco. Welcome. And thanks for joining us.
Francesco Starace: Thanks for having me.
Mark Wiedman: So Francesco, let's start by telling us about ENEL.
Francesco Starace: ENEL was born right after the second world war in the sixties, when like most governments in Europe, the Italian government realized that they had to nationalize what private companies existed in the electricity space in order for electricity to be brought to parts of the country that didn't have it. And so it was born as a nationalization of more than a thousand large, medium and small private companies that existed at that time. And the mission was to basically electrify Italy throughout - so not just the cities under the places where people would live, but everywhere. So, this is what happened more, more or less in all European countries, right after the war. Now we are no more just an Italian company, we're a global company, but it happened in different phases as a function of the evolution of this sector in Europe, which took place between, say beginning of the sixties until the end of the nineties, that's where most of the privatization took place. That's where we are today.
It's a large company. It's a multinational. e are the largest distribution network system privately owned around the world, in 30 countries. Italy included, of course, but I don't think that was in the idea when was formed, but it happened...
Mark Wiedman: Can you talk about the evolution from a heavy fossil fuels organization to one that is leaning into a green energy generation platform?
Francesco Starace: The funny thing is that when ENEL was formed, it was mostly a hydroelectric company. So most of that energy was generated by hydro plants. Then during the sixties, oil was mostly used. After the first oil shock in the seventies, ENEL like many other European companies started a nuclear program to use less oil and that was canceled after the Chernobyl accident. And then, at that time, ENEL moved into coal and gas, and as things unfolded during the privatization of the energy sector that took place, like I said, around the nineties in Europe, following the Europe directive that covered the sector ENEL started investing in gas and then started developing renewables around 2008, 2007. They were completely a niche technology, but ENEL created ENEL Green Power at that time where all the renewable energy plants we had were put together. Nobody knows but the USA was the first acquisition that ENEL made outside of Italy, and this was the beginning of a new ENEL which gave us the major impulse of really de-carbonizing, our energy mix between 2008 and 2009. Just when the Lehman Brothers crisis was out.
Mark Wiedman: The transition started in 07/08. In terms of shifting towards renewables. What triggered that transition? Was it economic regulatory, technological?
Francesco Starace: ENEL needed to reduce the debt. So ENEL created this company and said, we'll put it in into the market and need the proceeds to cut down debt. This debt was accumulated because a little bit earlier we had acquired Endesa, which was a big Spanish company a few months before the Lehman crash. Then we had ENEL Green power, we had the vision that this business was going to become very competitive. At that time, it was a very protected and subsidized niche We said this cannot go on for a long time, but there are reasons why we thought that these technologies will take over thermal generation. And you might remember at that time, this was called alternative energy sources. And we also said alternative to what? Basically, they will become mainstream. So, the vision we had was that this was going to become a very wide-open battlefield of competitiveness driving the industrial evolution of these technologies. And that proved to be right. At the beginning it was very difficult because people didn't understand, even the market didn't understand. People saying, you must be stupid. Why don't you just follow the money? Why don't you forget this dream of competitiveness? But that actually happened.
Mark Wiedman: So you were triggered by the Lehman crisis to actually set up ENEL Green Power, what were the underlying economic and technology drivers that made that effort work as opposed to doing it 10 years before?
Francesco Starace: I think it was the fact that technology had improved and the cost of generation with renewable energy was going down faster than people thought. Two forces were doing that. One was a digital thing and the improvement in material science. So things that make things, materials with which things are made kept improving and are still improving a lot. And also, I would say the industry had at a certain point reached, it became in a few years, a large industry, and that drove costs down.
Mark Wiedman: Digitization, materials, science advancement
Francesco Starace: And dimension…
Mark Wiedman: and scale. What is digitization? What does that mean in terms of the efficiency of generating electricity
Francesco Starace: For the improvement of technology, computing power became large enough to simulate the behavior of machines in a better way. So that designers had ways to improve without having to go through cycles of trial and error but just do it, also digitization is a large force behind improvement in material science for exactly the same reasons simulations can take place. And that drove the whole thing down.
Mark Wiedman: Where will you be at the end of the decade?
Francesco Starace: We have a path that says we're going to be zero in 2040
Mark Wiedman: What's the biggest obstacle in getting there?
Francesco Starace: The speed at which you can convince regulators that you can close thermal power plants. Grid operators and the grid managers always feel that the moment of detaching the existing power plants is a little bit risky. There is always a relative pushback for the integrity of the network for supply service and concerns. It's not the money, it's not the projects, it's permitting. But this will eventually be something that in retrospect, people will say, why didn't we do this before we knew this was going to happen? And, we lost a little bit of time.
Mark Wiedman: Can you talk about the cluster of issues around stability of the grid, storage of when renewables are not able to function and the technologies you see as bringing those together?
Francesco Starace: Say that every time we flip a switch in our home or factory or offices, we introduce a micro disturbance in the perfect equilibrium that electricity production consumption has to have every time. So, the system is self-balancing most of the time provided that things happen with some tolerance. So, networks are designed to cope with these kinds of turbulences all the time. These are networks that were built when the power was supplied by very large power plants, and then moved out into millions and millions in homes but as you de-carbonize it becomes much more fragmented. So all we need to do is make sure that the flexibility of the network is kept balanced. Technology today helps you have a lot more contraptions you can use to do that. Who knows how networks will behave when electric cars will be millions and not a few thousands. When heat pumps will be millions and not a few thousands. And how can these networks be changed in order for this to happen safely? And the answer again is digitalization. So, you have to digitize the networks so that they go in two directions, not just in one, not just from the generation to the consumer, but from the consumer back. Or to a consumer, to another consumer, and this is again another benefit of the digital transformation of the sector that enables flexibility with limited costs and much more security of supply.
Mark Wiedman: Is that what we call a smart grid?
Francesco Starace: That's a smart grid. Smart grid is a grid that uses intelligence and automation to move electrons in different directions, according to the need in the most, most efficient way.
Mark Wiedman: Let's talk about innovation and your approach to innovation, which is about disciplined vision is the way I look at it. How do you combine short term results with radical reinvention?
Francesco Starace: You have to accept mistakes. You cannot have innovation if you don't want to have mistakes. Nobody wants to have mistakes, but you have to accept that they happen. This industry is all about not making mistakes because mistakes will invariably result in huge problems. So the culture of this industry is a culture in which number one, don't make mistakes and number two and three also. What you want to do is first of all, debunk a little bit, this no make mistake story and let people feel free about making some mistakes provided they don't keep repeating them. And then don't try to innovate if you cannot in this climate, but rather come with problems that you want somebody else to solve. And we created these innovation hubs outside of ENEL. We have now 13 around the world where we bring problems for smart people to go out and try and solve. And then what happened is that when you see that out of five ideas, four are useless and one works then suddenly our people also understood that it is. Even the smart people make a lot of mistakes. They did lots of rubbish there too. So they started coming with their own ideas and we found that we had innovation at the company only were scared and feeling that they didn't want to look bad.
Mark Wiedman: How long do you give a new technology or experiment before you decide it's a failure?
Francesco Starace: In this field, if you try hard a technology that doesn't show a good sign of improvement in three years. Take costs, they should go down 50% in the first three years, if they don't do that, maybe it's time to give up. There's no shame in that. It is an amount of time that you should be able to see some decisive moves. If you don't see a good in three years, maybe it's time to really take a hard look at it and say, maybe not.
Mark Wiedman: Carbon capture buyer or seller?
Francesco Starace: Not in this industry. We tried for much longer than three years. We tried for 15 years. the whole industry tried hard. I don't need to decarbonize when you get de- carbonize at the root.
Mark Wiedman: What is success for hydrogen?
Francesco Starace: Could work. We are in the three year time. So we are the first of the three years. It's early to call, but call me again in a year and a half, , theoretically there's a chance. It's cost parity of green hydrogen with present hydrogen production. So it means you have to have a hydrolyzed whose cost should go down a factor of six.
Mark Wiedman: Okay. So just to unpack what you're saying, green hydrogen, which is the manufacturing from renewable sources of hydrogen which you can burn at a later time. You're saying success is in two years, that the cost is down 87% versus today.
Francesco Starace: Basically sixfold, yes.
Mark Wiedman: Do you think that the Russian invasion of Ukraine is an accelerant or a retardant of decarbonization of the economy in Europe?
Francesco Starace: Definitely an acceleration. Although in the short term, it's probably going to produce more CO2 because of the coal substitute, but that's just a blip.
Mark Wiedman: If you were starting a totally new company Francesco's startup, where would you focus regarding the broad transition to a low carbon economy?
Francesco Starace: On storage. Because the storage we're using today is a byproduct of the storage that cars are using. So it's a compromise between the performance as a storage and the weight of it because you have to move it around, but it's not the best performing technology. I think that's a very hot moment for that stuff.
Mark Wiedman: So our startup, cuz it's gonna be both of us is going to be about batteries that don't move effectively, getting away from lithium ion technologies, gas.
Francesco Starace: Yeah, perhaps, or finding something else, but definitely forget about the weight of the battery and focus on the performance and the cost.
Mark Wiedman: One last question about technology in your business, you are repurposing your gas and coal plants. What are you doing?
Francesco Starace: In most cases, there is nothing else than just convert the site to another industrial or non-industrial use. There's no generation of electricity worth mentioning. So what we did is we said, dear mayor of the city nearby, this site is no future. So we're gonna shut down. Now, why don't we just create a small committee and altogether invite entrepreneurs, architects, whoever wants to come with an idea to what to do with this site. And together we choose what we like. And our job is to clean up, of course, we get the stuff out of the site and give it to you and it's surprising how many ideas come up. It's you find all kind of things, tourist villages, extreme sports centers, commercial centers, museums, there's plenty of stuff that you can do.
Mark Wiedman: Our battery startup could have a subsidiary in converting power plants into laser tag facilities.
Francesco Starace: Why not? There's plenty of stuff you can do.
Mark Wiedman: Can you talk about what you've learned about leading people, your organization, including stakeholders outside the organization through this transition to a much lower carbon footprint business?
Francesco Starace: Well, I think leading people requires clarity on what we want to do. If you say follow me, that's not enough. You have to tell the people, look, we would like to do this. This is the reason why we are here. Our purpose is this one. And to that end, we think we should do this and that. Typically, this is, most of the effort is to be clear to what we want to achieve together. Make it understandable to you first. And then if you understand it, then it's easy to transmit. In ENEL years ago, we asked the people what they thought were the basic values of ENEL and so it was pretty easy. They were pretty aligned. It was not that difficult. By the way, when you communicate outside, you should communicate exactly in the same way. You cannot have a communication with your people and a totally different one outside. It has to be coherent.
Mark Wiedman: In the digital age of social media, one story for all stakeholders, you can't have multiple.
Francesco Starace: Exactly, you can’t have internal, external, transversal, north, south, it’s impossible.
Mark Wiedman: When you look at the landscape of other parallel industries that are going through a similar transformation, everything from automobiles to shipping, to construction, generally, do you favor the attackers or the incumbents?
Francesco Starace: It depends on the incumbents. I mean, it is funny, but the incumbent have a upper hand only they don't know. Because the attackers are successful in so far, they are sleepy. But if the incumbents behave in the right way, it's very tough for an attacker. Actually, it's almost impossible. So it actually depends on the incumbent. How quickly he frees himself from the legacy. It's all about. How you wanna get rid of the legacy that ties you to your past the fastest you do it, the more difficult for an income or for an attacker is.
Mark Wiedman: So incumbents, wake up, come out of your enchantments and the future is yours.
Francesco Starace: yeah, yeah, yeah. Yeah. They have a huge chance.
Mark Wiedman: Let's talk about the future. If you could redo from a white sheet of paper. the world's energy system right now. What would it look like?
Francesco Starace: Much more interconnected, much more dispersed, and the proximity between consumption and production should be much bigger than today.
Mark Wiedman: How would you price in that world?
Francesco Starace: I think it would be probably on a fixed price, regardless of consumption.
Mark Wiedman: So effectively high fixed costs, capital, right? Like using data for your cell phone plan.
Francesco Starace: yeah. Your phones, there was a time ago where, I remember my mother said, you cut it. Cut it because you were paid by the minutes, but it's gone. It would be flat.
Mark Wiedman: Last question. What do you think Francesco is the single most important thing that needs to happen to get the world to net zero?
Francesco Starace: It’s one thing that will happen in two steps, the first step is take the word net away and focus on zero because only that drives innovation. Deep enough, if you put the net word before you never get there, because net is an illusion but if you start with the net, it cuts the innovation by a factor of 10.
Mark Wiedman: To get to real zero. What's the number one thing that has to happen.
Francesco Starace: We have to focus on innovation. Innovation. We get there. It's really the key to that.
Mark Wiedman: Innovation in technology, business?
Francesco Starace: Innovation in both in technology and business models, because they go hand in hand typically technology brings about business models, radical innovation. So you have to be open to both. They sustain each other in a big way. If you look at closely to this climate, Is a unifying force. I like no other that in the history of mankind, there's never been a planetary problem that everyone recognized more or less. So it's a huge opportunity. It's a strong effort that everyone sees us doing something for himself, not just for some distant planet somewhere. That force can be used, provided you free innovation and you innovate business models.
Mark Wiedman: From Francesco, by the end of the decade, you'll be 90% down in carbon emissions relative to most electricity producers. Looking forward to talking to you again then, and thanks again for joining us here on the bid.
Francesco Starace: Thank you so much. It's been really fun. I loved it.
Mark Wiedman: Take care Francesco.
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