From Carbon to Code: the First Energy Transition and the Triumph of Optimism

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“Like every other destruction of optimism, whether in a whole civilization or in a single individual, those must have been unspeakable catastrophes for those who had dared to expect progress. But we should feel more than sympathy for those people. We should take it personally. For if any of those earlier experiments in optimism had succeeded, our species would be exploring the stars by now, and you and I would be immortal.”

David Deutsch, The Beginning of Infinity 

It is time to change energy, and be optimistic about it.

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Before 2010: The Commoditisation of Energy

There was no energy transition before or during the 20th century, or the first decade of the 21st.

Energy production methods remained mostly the same as in pre-historic times.

Prior to the 20th century, primary energy production for human energy consumption was the burning of biomass (wood, peat, coal) for heat, power and light.

In the 20th century world population quadrupled, and consumption devices evolved.

Radiators for hearths, electric light-bulbs for candles and gas-lights, cars for horse-drawn carriages.

But in energy production, little changed.

Oil and gas emerged as new fuels to be burnt alongside wood, and coal: new sources, but same energetic method, combustion of carbon.

Energy production indeed grew larger, but only by burning more fossils from newly-discovered giant oil and gas sources (mainly in the Middle East).

Thus 20th century energy progression was a clever, but incremental and non-categorical shift from locally-extracted-and-burnt fuels to industrially-extracted-and-burnt fuels.

To be economic and scalable the fuels used for light, power and heat (mostly gas and coal), and then transport (mostly oil) passed into a vast hinterland of large extraction and distribution entities, allowing consumers to benefit from scale economies.

Over time, this hinterland developed into national and international oil and gas companies.

The history of this is geo-politically interesting, but straightforward in terms of technology and economics (see for example protracted tomes such as The Prize): energy came to look and operate like a typical commodity, like wheat or copper, because most energy relied on fossil fuels which came to be traded globally.

BP’s Statistical Review of World Energy puts this non-transition into perspective: over the past 50 years the modern and expanding urbanizing world has sourced over 85% of its primary energy from fossil fuels in an almost flat-line trajectory.

This has allowed the multifaceted nature of energy to develop a widespread
short-hand, and with it an availability heuristic: fossil fuels are global energy, so global energy is a commodity dominated by the ebbs and slows of supply and demand of coal, oil and gas.

It turns out this notion of energy as commodity is now starting to collapse.

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2010 – 2022: Energy’s First Transition

Soon after historians point to Peak Oil in the early 2020s they may trace it back to a key alteration: regional carbon extraction stopped expanding and ceded more and more growth to non-carbon energy manufacturing technologies.

They may also note that the world oil and gas industry was less established and more vulnerable than it had supposed.

The current oil and gas sector is only about 60-70 years old, younger than many of its Chief Executives.

World population has trebled since its inception, and has transformed from 25% to 55% urban since it began – hence it has abetted and ridden a tremendous demand wave of per capita energy consumption (4-5% pa for decades, although now declining to below 1% pa).

This leads some prominent academics, analysts, corporations – Vaclav Smil, IEA, Exxon – to extrapolate that any energy transition will have to deal with this continued form of fossil fuel dependence – growing at low but positive levels.

They view long-term carbon energy dependence like a resigned acceptance to chronic inflammation.

New energy sources will merely layer on top of a bedrock of fossil fuels, and environmental consequences will have to be dealt with rather than cured.

This is a strange conclusion – because the world directly ahead of us is unlikely to develop like the previous one: and likely will be its opposite. And energy, which is integral to this change, will transform within it.

Over the next 30 years the world population will near a peak rather than continue to grow robustly, and urbanization will reach over 85% in the OECD and 70% globally.

And energy consumption will decline, not increase, becoming electrical and metropolitan in character.

For carbon is not a magical, rare form of energy: it is merely a supple, earth-bound and adaptable element of the periodic table whose promiscuous bonding capability with various other elements such as hydrogen and oxygen provides us with gas, gasoline, coal and carbon dioxide – the latter turning out to have a pernicious side-effect.

There are alternatives.

Through wind, solar and battery storage energy is becoming globally manufactured, distributed, solid-state, scalable, electrified and modified to urban environments that will require it for the long-haul.

Their headline feature is their low to zero carbon emitting capability, but their real killer app is an ability to reduce cost the more they are deployed – the exact opposite of fossil fuels whose costs increase over time (big simple reservoirs are exploited first; smaller, tricky costly ones later, ie now).

So far in the 21st century manufactured energy (wind/solar/batteries) have have shown learning rates of 15-20% pa, meaning costs have reduced, in batteries and solar panels for example, by 90% between 2010 and today. This rate continues.

Energy consumption will therefore decline because over 50% of the coal and gas used today is used to generate electricity, but in a wasteful burning process that is at best 35% efficient.

So as energy electrifies, it captures the benefits of the manufacturing economics and learning of wind, solar and storage in a feed-back loop (see Swanson’s Law, effectively another variant of Moore’s Law – indeed Moore’s Law is in effect an energy law the more energy electrifies).

Electricity demand has grown at more two and half times the pace of oil demand over the past 10 years: this means it now accounts for around 35% global energy consumption versus oil’s 33%: by 2030 it could account for 50%.

So as we rely more on electricity for consumption and wind and solar for production, energy efficiency will increase rapidly and overall usage decline (technical note: see here why the Jevons’ effect is not likely to be important here – energy efficiency will now – at last – be able to outpace other growth effects).

source: Gregor Macdonald

By shedding carbon, energy production is now diversifying and decommoditising – energy is now less and less about the vast supply and demand flows of fossil fuels between nations, but more and more the connectivity of national grids and locally-installed standardised technologies.

Energy is developing within populations, not being shipped in from afar in tanker hulls, but in proprietary designs of solar panels and wind turbines.

That vast complex hinterland of fossil fuel extraction and logistics is not now required to expand, but rather contract and dismantle.

The new energy system is offering us options from the minute to the vast, and in scalable clean varieties, not just the limited offerings at the periphery of a giant hub and spoke thermal system.

The consumer is not now an afterthought, having to dispense fuel from the central hub via technologies (hearths, petrol pumps, gas pipes) that are centuries old.

The customer will become an integrated part of the energy system: providing it with moment by moment demand information, not just laggard aggregate data of bulk consumption.

Energy will now transform from being a distress purchase of gasoline on a dark, windy night, to a calculated download of electricity from multiple options, applications and comfortable venues.

Those energy historians will note that in the 2010-20 decade the whole energy system began to move more to the mathematical rhythm and economics of manufacturing curves, and less to the erratic arithmetic of commodity supply-demand.

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2020 – Decommoditisation: The reallocation of energy capital from carbon to code

If capital markets are about the “bringing forward of risks”, and presumably opportunities, to better allocate financial resources for future investments, there should now be a measurable move in global capital from carbon energy stocks to technical energy stocks.

And so here we are.

Traditional carbon energy stocks are now less than 5% of of the S&P 500, down 65% from a few years ago. Meanwhile tech stocks have grown by 70% to 25% of the market.

These movements may not be unrelated.

There is only so long we can keep calculating planetary energy by the simple commodity heuristic of how much carbon supply is meeting carbon demand.

As world energy starts to encompass far more solar, wind, storage and EVs, the carbon rule-of-thumb starts to disintegrate.

OPEC’s four-year long battle to sustain oil price with supply cuts is either just one more epic chapter in the eternal “oil cycle” of supply and demand shocks, or the signal of an irreversible shift in global energy from commodity to technology.

Carbon’s hegemony of global energy could well be over.

As energy production moves to technology not commodity, data improvements and learning curves start to drive energy development and untether it from geo-political disputes.

For example, how much of that tech stock growth is new energy activity ?

As energy moves to the electric grid we need to re-consider what an energy company actually is.

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2021: The Largest Renewable Energy Company in the World

We can name the largest oil and gas companies in the world with ease: but what is the name of the largest renewable company in the world?

Does this question actually have an answer other than, nobody knows?

And why is it so difficult?

Maybe by next year such a behemoth or obvious contender will emerge.

Maybe not.

Perhaps, as energy electrifies and shifts to manufacturing rather than extraction, the new energy system is still too ill-defined, still working itself out: reconfirming Warren Buffet’s adage about massive technological dislocations sharply identifying the losers (carbonaceous firms), but not the winners (“new energy” companies).

The biggest losers seem to be the major oil and gas configured firms and their entourage of supply chains, technically and culturally adapted to long-term fossil fuel delivery: the polaroid chemists of the energy shift.

But the winners ?

For example, is Tesla a car stock or a new energy stock?

Maybe the answer to this is in an adjacent query: is VW about to jump the stock index barrier from industrial to energy?

Note: share price change VW, Tesla, BYD Jan 2019-2020, source FT

Today, the world’s largest car company is just a peripheral part of the energy system by virtue of its need to configure its car design around gasoline-fired engines.

But Its switch to electric-governed powertrains will make it the producer of devices on a world-wide energy grid, not a stand-alone maker of stylized mini thermal power-plants.

VW at that point becomes more an “energy services company”” less a “car company”, because its primary focus is then to transform electricity into mobility and then offer energy applications to its captive device user.

Not just engineer a beautiful stand-alone product, and stand back admiringly, as per Nokia and Kodak.

Unsurprisingly its CEO wants to avoid such a Nokia—Kodak-moment: side-stepping the desire to continue improving the quality of a redundant technology.

Traditional car companies have discussed transportation as a service (TaaS) and autonomous vehicles for years: but that seems a loose conglomeration of ideas, many paper-based, rather than an honest hard-work manufacturing effort to build electric vehicle fleets to run on the world’s infinite ribbons of tarmac.

And then connect them to the world’s online capabilities.

So, perhaps add VW to the bona-fide current titans of electrified transport – Tesla, BYD – and suddenly all three may be considered new energy stocks

As road transport is more or less 50% of global oil use, this change simultaneously kills carbon’s growth via oil in transport, and promotes data’s importance, force-multiplying energy electrification.

Similar changes are being made in the power sector as grids switch to solar and wind sources: consumers able to interact and engage with energy actively rather than passively.

Smart motors and smart meters.

For now we don’t know who is the world’s largest “renewable” energy company, but capital markets having declared the energy losers by bringing forward carbon risk, are on the hunt for the energy winners.

Because energy is no longer about carbon.

As it scales and transfers to solid state and the electric grid it is more about information and code, less about carbon and its side effects.

Heat, light and mobility are a given: the new energy system will also allow choice, information and the diminution of environmental threats. .

The first true energy transition we have encountered is an optimistic one.

About time.

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Why we might be wrong: RCP8.5 – A Return to Pessimism?

“Problems are inevitable, and sooner or later survival will depend on being able to cope when prevention and delaying tactics have failed.”

The IPCC (Intergovernmental Panel on Climate Change) has developed several pathways that our world climate might take.

They generate controversy as forecasts do, not least because a few of their more pessimistic scenarios would have the earth heat on average above 5-6 deg C by in the next 70-80 years, and have wild variations around this causing national, regional and potentially global havoc.

The most pessimistic of all the pathways (RCP 8.5) requires us to return to heavy coal use, and essentially give up on new energy sources; accepting the fate of a hot earth and spending our wealth on adapting and alleviating the climate extremes as best we can – a sort of palliative care strategy for our civilisation.

This scenario is widely dismissed on technical issues, but the history of philosophy notes that returning to pessimism is a very real and very destructive trait of the human psyche, as Deutsch notes in the quote.

A return to coal may not be feasible, but a return to pessimism could be just as damaging for energy progress, and there are many ways to achieve it: restricting knowledge transfer, or embracing static world-views, and so on.

The reaction of oil and gas companies, industry bodies, and leading political parties in America, Australia and elsewhere to recent climate issues indicates a new return to pessimism by certain groups: a willingness to be cynical about the extent of climate risks or the development of talking points based on adapting to a future based on fossil fuels and their side-effects, rather than their removal.

It is dangerous territory for the planet, or a nation,  if it starts to follow return-to-pessimism scenarios: if it loses the will to confront problems and improve, it will become static, and highly vulnerable to change.

The use of new technologies, forward-looking politics, and the capital market’s drive to search out risks and opportunities, are the best tools we have (so far) to combat pessimism, and solve our latest major problem, climate change.

Two of these tools, manufactured energy technologies and global markets – are very modern creations and stack up on optimism’s side.

So we should have a bias toward confidence that we will solve climate change and improve our situation via ingenuity.

And then use the knowledge we acquire in doing so to prepare ourselves for the inevitable problems beyond.

 

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