2 + 2 = 4: The Energy Industry is now a battle between Technology and Ideology

“In philosophy, or religion, or ethics, or politics, two and two might make five, but when one was designing a gun or an aeroplane they had to make four.”

George Orwell, 1984


In George Orwell’s dystopian novel, 1984, the ruling Party instigates the language Newspeak: a controlled language of restricted grammar and vocabulary, designed to limit freedom of thought and expression.

Its structure is spartan and deliberately spare: there are no antonyms for example, all opposites are created via the prefix “Un-“,  and basic words with darker nuances preferred to complex or softer ones: thus warm is purged and replaced by “uncold”.

The focus on a Newspeak was due to Orwell’s constant concern over the power of words and language: he argued that “if thought corrupts language, language can also corrupt thought”.

This fear reached its grim conclusion in 1984 with the Newspeak word doublethink: the ability to hold two opposing beliefs as equally correct, or relax belief in basic facts to allow 2+2=5 when necessary to follow the Party’s policy.

Indeed, not adhering to doublethink, pursuing alternative facts, and thus rejecting Party dogmas, became the most serious offence possible – a thought-crime.

Orwell thus imagined a world in which not even the most simple building blocks of science and engineering were safe from forced ways of speaking and thinking by a powerful elite: even objective numbers would be co-opted into new ways of thinking.

This went far beyond the notion of statistical sloppiness or manipulation: Orwell was suggesting that ideologically-motivated reasoning would deliberately take known facts or data and force whole populations to accept alternative conclusions, even when they made little or no sense.

The various tools of Newspeak such as controlled vocabulary and doublethink were marshalled to make external objectivity – mathematical relationships, factual observations, lived experience and so on – obsolete, unless aligned with the Party’s beliefs.

Orwell’s novel was conceived during the Second World War – even so, he reckoned these ideological weapons were more terrifying than any bombs.

Energy’s Newspeak

The world is going through a major transition in a foundation technology – energy.

The problem for the incumbent industry and its support infrastructure is that the new energy is unlike the current one in kind, not just degree.

We are moving from concentrated large-scale energy extraction and development of fossil fuels and nuclear, to dispersed world-wide energy conversion technologies of wind, solar and battery storage: from economies of reserves to economies of manufacturing.

This means that many of the dominant forces of the current energy age – governments, companies, policies, analysts – may find little relevance in its replacement.

The scale of this change is therefore mobilizing huge opposing forces: those who wish to drive change and capitalize on the world-wide transition, and those who wish to resist it and preserve the prior dominance.

For those who believe that in fact the titans of today’s energy can emerge transformed as leaders of the new form, perhaps this chart indicates otherwise.

Note: oil company annual capex forecasts from latest announcements, wind / solar from DNV-GL analysis

Both energy factions are sustaining or building their global energy networks to service a world whose energy consumption is growing at barely 1% per year. As we noted in a post (a long time ago) oil companies are committed all-in to their energy world – they are victim to the curse of the creosote bush: it is almost impossible for them to divert substantial resources in to any other energy technology, without disrupting their core business.

And the scale is clear: when wind, solar and EVs and batteries were a tiny market, oil and gas companies could afford to dabble in them. But as these markets matured (quickly) and now cost hundreds of billions of dollars a year to play in, the traditional firms have to retreat to their core business.

Herein lies the crux of the energy transition.

Two vast opposing, distinct energy technologies are now in action chasing weak global energy demand growth.

This results in asymmetric warfare.

The incumbent fossil fuel and nuclear energy industry is well-understood and established: its adversary, (wind, solar, large battery devices and storage) moving on multiple fronts, is dispersed, emergent, fast-learning and alien to its opposition.

Perhaps unsurprisingly then, a kind of Energy Newspeak has begun to emerge.

As Orwell pointed out – ideologies tend not to do detail: they can live with growing inefficiency if they can preserve power. As long as the trains mostly run, the lights mostly work, and the people are mostly fed.

But Orwell’s glowering dominant Party survived only because the opposition was equally inefficient, equally inward-looking, equally ideological.

Sooner or later, if facts and data are continuously ignored, the inefficiency problems will mount up.

And if the opposition is constantly learning, growing more efficient, is geographically and organizationally disperse and so difficult to contain, the dominant system will start to feel very threatened.

If it cannot react with technological superiority, it will tend to respond with political or moral appeals.

New energy advocates are censured for appealing to the “unsettled” science of climate change, and are accused of being over-reliant on subsidies, threatening the job levels of the traditional energy industry.

In the power sector, the Newspeak of fossil fuel advocates is the classic Orwellian phrase “unreliable” renewables, compared to the “secure baseload” of fossil fuels. A usage that has moved from US advocates, to Australian counterparts and OPEC sessions at rapid pace.

In transport, worst-case scenarios about grid failure due to high-power consumption of electric cars and trucks are frequently quoted, and EVs are accused of using “dirty electricity”, therefore emitting more CO2 than, well, CO2-emitting petrol vehicles.

In the last case a sharp refutation from the MIT source authors cited is worth repeating: they had several objections, with the final one perhaps the most important:

“..the article assesses policies “as things stand”. This overlooks the main advantage of replacing petrol with electricity: not only do electric cars usually emit less than petrol ones already, but over time, as the carbon footprint of electricity continues to fall, that gap will widen. Electric cars have the potential to reach climate change mitigation targets that petrol cars simply do not.”

2 + 2 = 5

If all this sounds abstract political theory, let’s ground the impact in the day to day transition of energy underway, and the dangers for those companies drawn in to believing the defensive ideology.

As long as major companies only work to promote beliefs on long-term fossil-fuel energy dominance, and act on them, they put their stakeholders at severe risk.

In power, for example, both GE and Siemens, giants of the fossil-fuel supply chain, stand accused of clinging far too long to conservative IEA for coal and gas energy sector growth.

Each year for over a decade IEA wind/ solar forecasts have had to be reset higher, and coal/gas growth set lower – even after the collapse of the US coal industry in 2015-16.

GE has just shed 12,000 jobs and seen its share price collapse by almost 50% over the past year because it was wed to an insular fossil-fuel growth belief, supported by the IEA (though few others).

In Australia, the government promotion of coal-fired energy has put it in conflict with major power firms such as AGL who recognize that this form of electricity generation is now terminally inferior to wind/solar and storage.

In EV growth, most oil companies and analysts have congregated around expected growth targets at the very low-end of forecasts. Each month brings a newspeak skepticism about EV growth even as batteries collapse in price, sales continue at over 40%pa, and EV investment levels by OEMs constantly increase.

As companies act consistently with these self-absorbed projections, it threatens current industry leaders in several ways: oil and gas companies, for example, increasingly run the risk of stranding assets as oil demand retreats; and global OEM manufacturers are ceding EV technology and manufacturing leadership to Chinese and niche firms.

This latter scenario is already well underway with China accounting for over 50% of the EV 1million sales in in 2017 – a global market now increasing at over 60% pa.

A McKinsey report from earlier this year shows how China has already won some critical battles in the ground war for long-term EV technology global leadership:

With greater strategic foresight, BMW, VW and GM could be dominating this sector. But with two divergent ideologies to supply, pro and anti-EV, international OEMs are stuck in a high-cost world of dual-development.

Small wonder that investors appear to be preferring Tesla, an EV pure-play, and large Chinese EV manufacturers such as BYD.

source: FT, share prices indexed to Jan 2015

Orwell, against all his instincts, may have found a strong ally against ideological thinking in the structure of international capital, and its uncaring devotion to shareholder returns – in effect a hedge (imperfect for sure) against local policy dogma.

Technology vs Ideology

Two plus two has to make four for a better, more efficient global energy to flourish: the new energy technologies provide an opportunity for a far more scalable, dispersed energy than we have now.

The new technologies can be globally manufactured, and made efficient at various sizes: their costs are trending rapidly lower and lower over time,  even as the incumbent fuel-based system  restricts supplies to force prices higher.

This pits new energy against the two plus two equals five character of the incumbent energy ideology  – whose defensive policies and dubious forecasting divert the efforts of its companies toward inefficient investments for stakeholders and customers.

Orwell’s melancholic message is clear: such ideology triumphs if there is no better or more efficient alternative.

However, if global technology and global companies provide that energy alternative, and focus on the economics and manufacturing learning curves, two plus two will still make four.

And prevail.

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