Re-perceiving energy system transformations

This article builds on, and extends, the previously published illuminem article Re-perceiving energy system transformations.

I have been working across the global energy system for decades. It is vast, complex and integrated into just about every part of our lives. As a reminder, we cannot operate, build or move anything without energy.

At the same time, we need to urgently and radically transform the energy system to boost security and to eliminate greenhouse gas emissions. This demands 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 recently-deceased Nobel-prize-winning behavioural economist Daniel Kahneman has pointed out, we generally behave as though “What We See Is All There Is”.

Many of our perspectives are conditioned by decades of public dialogue and the “received wisdom” that has evolved from this. The problem, of course, is that public dialogue often mixes multiple issues together so that the emerging “received wisdom” may not always actually be wise. This is the case with crucial aspects of energy transition, and that is a key inhibitor to the pace of transformation.

In “re-perceiving” energy transitions, there are three important perspectives that need to be addressed.

The critical uncertainty is not “faster or slower” but “sooner or later”

Most future outlooks interpret change as evolving from the present at either a slower or faster pace, e.g. the deeper electrification of the economy or the adoption of sustainable aviation fuels. This is partially an artefact of models and illustrations that aggregate data, e.g. from different countries or different economic sectors at different phases of change, to show “averages”.

But it is also the result of a template for “steady” change that is deeply rooted in our psyches.

If you stand back and look at the reality, however, many changes that are significant happen “fast” and are often disruptive. You only have to look at what is happening currently with the global sales of battery-electric passenger vehicles or the deployment of solar power, or further back to the growth of the LNG industry in the 1970’s. And because global systems are so large, this explosive pace of growth can last for decades before it begins to be moderated by saturation effects.

This is largely driven by competitive dynamics. Once the stars align and an early mover demonstrates even the slightest prospect of success, fear of being left behind motivates others to jump in as well. This happens not only in business but also in the accompanying arena of government policy. For example, the policy- driven success of Chinese solar panel manufacturing spurred the European Green Deal and the US IRA policies, which seek similar domestic industrial successes.

The stars aligning – pioneer businesses, early customers, supportive policy, and supply-chain partners – create a so-called “tipping point”.

Thus, the critical uncertainty is not “how fast?” will a development take-off – it is almost always fast – but it is “when” will such take-offs occur? Looking from today’s perspective, will the stars align sooner or later?

This changes the core strategic question that needs to be addressed from “Should I gear up to move quickly or slowly?” to “Given that the precise timing of disruptive take-off can never be predicted, is it wiser to err on the side of potentially moving too soon or potentially moving too late?”.

Often, moving early to build competitive strongholds will be the wiser option, especially when accompanied by efforts to align the stars as quickly as possible and prepare fertile ground for the subsequent take-off.

The transition is not “high cost” but “high opportunity with modest cost”

Many articles emphasise the trillions of dollars of investment costs that will be required in the coming years to accomplish energy system transformation. Only some of these are willing to bring the focus specifically on the additional investment over and above “business as usual” expectations.

Even fewer, however, place this in the context of total investments in the entire economy to recognise the relatively modest scale of energy transition investments. Fewer still emphasise that “costs” for one party are usually “revenues” for another, so that the overall drag on the macro-economy is actually very modest.

With this broader landscape in view, the impact proves to be just a few percentage points in the projected size of the entire economy looking out decades from now. This is equivalent to just a couple of years of economic growth at most and is very small compared to the impact of, for instance, politically-driven trade frictions or dislocations in monetary or fiscal policy.

This also doesn’t take into account the positive macro-economic stimulus to be expected from new technological possibilities and new types of employment with associated educational spin-offs. Similarly, it doesn’t take into account the potential avoided costs from averting the worst impacts of climate turbulence.

Indeed, the modest nature of even direct costs becomes apparent once they are translated into their impact on the final costs of what people actually consume. While the added costs to manufacturers of making “green” steel or textiles may be 50% or more, the cost impact on consumers may be as little as 2%, e.g. just $1 on a pair of jeans.

In fact, the explosive growth highlighted previously, along with modest additional costs that premium markets can readily absorb, presents exciting economic opportunities for companies and countries who are forerunners in attractive transition areas. Despite recent mis-steps, Tesla, for example, ignited the global market for battery-electric passenger cars and now has a market value ten times that of traditional giants like GM and Ford. Of course, sustaining value growth alongside, and beyond, demand growth requires developing advantages that cannot be competed away easily, but early-movers also have early opportunities to secure sweet spots.

So, the overall collective “cost” to society of making these investments will be low or even entirely offset, and can also bring great prosperity to some investors and good jobs to many people.

The challenge is that, usually, the benefits and costs are not evenly distributed. Considerable effort is required to align the stars in a way that is both commercially effective and morally fair. Alignment mechanisms are needed to motivate, reward or compensate those sectors of the economy and society where investments and costs are concentrated. This is the real challenge, not the magnitude of the so-called “costs” themselves.

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 often limited to enterprises that produce and sell fossil fuels, or enterprises that use a lot of them. We rarely reflect on why there is a demand for these fuels. We don’t connect the dots leading back to our own demands.

As individuals, we are enmeshed in a system of goods and services that built on considerable embedded energy or on material content largely derived 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 and so, in the words of the economics profession, demand is very inelastic in the short-term.

This means that when there are supply disruptions, as happened with natural gas due to the Russia/Ukraine crisis, rationing of shortfalls occurs through soaring energy prices. These feed into increased prices for everything in the economy to cause cost-of-living crises that are felt most acutely by the poorest in society.

The narrow and simplistic supply-led perspective on energy transitions implies, for many, ratcheting back fossil fuel supply. As discussed above, however, this is actually a recipe for hurting the vulnerable and further mis-directing attention away 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, synthetics 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 ultimately intersect with our everyday lives.

Fortunately, however, just 8 of these chains account for over 50% of emissions - fashion, food, electronics, personal care and similar fast-moving consumer goods, automotives, construction, professional services, and additional freight outside these business chains.

In addition, as noted previously, 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 needed far upstream in the supply chains that eventually deliver those final goods and services to consumers.

Mechanisms are needed that draw sufficient revenue from consumer-facing activities to the upstream heavy industrial operations behind the scenes where investment is required.

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

The battery-electric vehicle success driven by Tesla has already been highlighted, which began with a premium market for a “computer on wheels” with crucial initial support from Californian regulations on low- emissions vehicles. Similarly, high brand-value companies like Coke and Lego have rewarded the chemicals company Braskem for producing sustainable bio-plastics.

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).

Transitions can be powerfully demand-led, and viewing business-chains from the final end-use demand perspective could be the powerful lens that drives change.

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 wrote “The difficulty lies not so much in developing new ideas as in escaping from old ones”.

Yet, if we re-perceive energy system transformations as a series of potentially fast, opportunity-rich, modest cost and demand-led tipping points of uncertain timing – rather than just a single, slow-moving, costly and supply-led “hard slog” – then we might start getting somewhere. That would be smart business, smart policy and smart politics.

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.