Re-perceiving energy system transformations

I have been privileged to work across the global energy system for decades. It is actually made up of multiple interacting systems that integrate into just about every part of our lives – we cannot operate, build or move anything without energy.

Yet we also need to urgently and radically transform these energy systems to eliminate greenhouse gas emissions. This requires re-engineering the bulk of the global economy.

How we approach this task, where we direct our efforts and, ultimately, our success, all depend on how we “see” the nature of the system and its transformation. This is a psychological matter as much as a technical one. As Nobel-prize-winning behavioural economist Daniel Kahneman reminds us, we generally behave as though “What We See Is All There Is.”

One crucial aspect of energy transitions that we need to recognise better is that the “demand-led” perspective is more powerful than the “supply-led” point of view.

Our ability to see the bigger picture is understandably, but unfortunately, limited. Because greenhouse gas emissions derive from fossil fuel combustion, attention is narrowly drawn to enterprises that produce and sell fossil fuels, or enterprises that use a lot of them. We generally fail to consider why there is a demand for these fuels. We don’t connect the dots to our underlying needs.

As individuals, we are immersed in goods and services that have a considerable embedded energy or material content which is currently derived largely from fossil fuels. The bulk of everything we do and use depends on them. Think of your furniture, your clothes, your food, your electronics, your house, the road you drive down, and so on.

Everything needs energy so, in the language of economists, demand is very inelastic in the short-term.

This means that when there are supply disruptions, such as happened with natural gas due to the Russia/Ukraine crisis, rationing of shortfalls occurs through soaring energy prices. These feed into soaring prices for everything else in the economy, causing cost-of-living crises, which particularly hurt the poorest in society.

The narrow and simplistic supply-led perspective on energy transitions implies, for many, ratcheting back fossil fuel supply, which is actually a recipe for hurting the vulnerable as just described. It also mis-directs attention from where it needs to be.

Instead, we need to aggressively and persistently reduce the demand for fossil fuels by changing the end-use technologies which currently need it, e.g. through using vehicles with electric motors rather than internal combustion engines; making steel, concrete, synthetic fabrics and fertilisers in different ways; and adapting aircraft and ships to use sustainable fuels.

But even these activities are often only intermediates in the multiple business chains that eventually intersect with our everyday lives.

Fortunately, however, just 8 of these business chains account for over 50% of emissions, such as fashion, food, electronics, personal care, automotives, and construction. In addition, sustainably-produced versions of these goods would only add a few percent to the overall cost for the end-consumer.

The challenge is that the substantial investments required to reduce emissions are generally far upstream in the supply chains that eventually deliver those final goods and services to consumers. When distributed across end-consumers, the cost increases they would experience may be less than 1%, or only as high as 3-4% at most, but the cost increase to an individual steel manufacturer upstream in the supply-chain may well be above 50%.

We need mechanisms that draw sufficient revenue from consumer-facing activities upstream to the heavy industrial operations behind the scenes where large investments are required.

This could be enabled by, for example, premium markets in those goods like fashion, electronics, automotives, construction and food highlighted above, and by imposing regulatory standards for their emissions footprints.

For example, the identification of an attractive premium market for a “stylish computer on wheels” has generated significant market value, investment in technology, and returns on investment for Tesla and its upstream battery manufacturing partners, which kick-started the global boom in sales of battery-electric passenger vehicles. This market success also gained crucial initial support through Californian regulations on low-emissions vehicles.

Voluntary and mandatory standards, and labelling, have also played a huge historic role in driving investments in energy efficiency improvements in end-user products (e.g. the Japanese Top Runner programme) and reducing cfc-use in refrigerators (the Montreal Protocol).

Energy transition needs to be demand-led, and viewing business-chains from the final end-use demand perspective can be the powerful lens that drives that.

In summary, to accelerate change, there are some things we must “see” differently from how most of us see them currently. This re-perceiving is not easy – as the great John Maynard Keynes has written “The difficulty lies not so much in developing new ideas as in escaping from old ones.”

Yet, if we re-perceive energy system transformations from the end-user demand-side perspective – then we might start getting somewhere much more quickly and effectively. That would be smart business, smart policy and smart politics.