Technology and Mother Nature

Moisés Naím / World Energy & Oil

A study of 3600 major companies published this year by Accenture, a management consulting company, examined the exposure of major industrial sectors to disruption. It found that the energy sector is the most vulnerable, followed by banking and utilities. The report reiterates that disruption can take different forms and varies from industry to industry, and even among companies within the same industry. For some corporations, disruptive forces pose an existential threat, while, at the same time, they create attractive new possibilities for others. The main source of disruption in the energy industry are new technologies. This is unsurprising. What is, however, rather unexpected is that these new, disruptive technologies are also helping preserve, and in some cases even reinforce, traditional strategies and business models in the fossil fuel sector. These clashing forces of disruption and continuity are influencing the direction and speed of what, so far, has been an orderly, albeit slow-moving, global transition from a high carbon to a low carbon economy. If this transition is not speeded up Mother Nature will become the most important source of disruption in the energy industry and, arguably, in all industries. It is tempting to evaluate disruption and continuity on the basis of their short to medium term economic or technological impact rather than in terms of the true end-game, which is their impact on the future of the industry and ultimately of our planet. From this perspective, innovations that disrupt the fossil-fuel industry and promote the use of new, cleaner sources of energy appear to be headed in the right direction. There is abundant proof that such a process has already been initiated and appears to be irreversible, but the central question remains: will this change take place in time to prevent a major global upheaval?

Change and continuity
The best-known and most dramatic example of a new technology that has upended the energy sector is hydrofracking. Paradoxically, this new way of producing energy from fossil fuels also contributes to slowing down the speed at which the industry moves towards a lower carbon business model. By making it possible for the United States, one of the world’s top oil consumers, to also become one its leading producers, fracking has lowered the risks of drastic disruptions in the orderly supply of oil to the global market. The risks of supply disruptions caused by geopolitical accidents were higher when the swing producers were located in politically unstable areas like the Middle East and Latin America. By boosting the reliability of supply to the world’s oil market, fracking helps to prolong the life of fossil fuels as a predominant source of energy. Significant new sources of supply of cheaper, less polluting, higher quality oil and cleaner natural gas are available thanks to fracking. This, in turn, facilitates a slower and perhaps a less disruptive transition towards a situation in which renewables substantially replace fossil fuels as sources of energy. The risk, of course, is that the transition is slower than desirable or necessary. Many experts believe that what the world needs is an acceleration of this transition, as its inevitable costs may end up being lower than those created by too slow a shift to a global economy that consumes drastically less fossil fuels.

New technologies can help in this transition. Although few technological innovations in the energy industry have been as impactful as fracking, there are many less spectacular innovations that are also transforming the ways in which we search, produce, transport and consume energy. The examples are too many to list, but to illustrate the range and potential impact of new technologies that are already changing the energy industry, suffice it to mention the simple solar charger that when placed in a sunny window can store up to 10 hours of electricity or the popularization of batteries for electric cars or industrialscale batteries that reduce the problem of intermittency in the solar and wind energy production.

The good news is that the “greenification” of the energy industry is now in full swing. According to the International Energy Agency, renewable energy will make up about 40 percent of global power generation by 2040. This is possible thanks to the advent of cheaper and more reliable technologies for the production of renewable energy.

Although the 2017, Thomson Reuters Index of the top 100 Global Energy Leaders is still dominated by oil and gas corporations and related utilities, close to 10 percent of the companies in this list belong to the renewable energy sector. In parallel to this intense effort by private corporations an impressive array of innovations for energy generation, conversion and storage are being developed in academic and governmental research centers.

Fast-growing disruptive renewables
In the 2017, Thomson Reuters Index of the top 25 companies engaged in renewable energy generation, twelve generate solar power, eight generate wind power and five are engaged in the production of biofuel. According to the projections of the U.S. Energy Information Administration, EIA, in 2040, wind and solar will become the predominant sources of electricity generation, significantly surpassing the growth of hydroelectricity. In particular, tangible cost reductions, tax credits and technological improvements are stimulating the rapid growth of the solar energy sector. British Petroleum projections indicate that by 2040 renewable sources of energy will make up to 26 percent of the world’s energy supply, about the same percentage of natural gas and, clearly, will have overtaken coal as an energy source. According to Bloomberg, by 2040 about 54 percent of all new car sales will be for electric models, representing savings in fossil fuel consumption of some eight million barrels of oil per day.

Irreversible, slow transition
That renewable energy sources will increasingly replace fossil fuel is a clear trend. Less clear is the speed at which this replacement will take place. Many experts believe that the change will be too little, too late. James Temple, for example, reported in MIT’s Technological Review that, despite the efforts to change the energy model, in 2017 the world still increased carbon emissions by about 2 percent. At this rate, he alerts, the desired transformation of the energy system would not take three decades, as now planned, but four centuries. The effort required to accelerate the rate of change by a factor of 20 is so enormous, the report notes, that it can be best imagined as the overhaul of the U.S, economy into a war economy without being at war.

The incentives to undertake this massive endeavor are largely absent due to lack of the public’s awareness of—or indifference to—the looming threat. Moreover, as is well known, since the effects of carbon dioxide emissions are significantly delayed in time, they become fully apparent to the public only after they have become irreversible.

In conclusion: we need more, different disruption
The energy industry has been disrupted and has changed accordingly. Most of the disruption came from new technologies. This will continue. But a source of disruption far more potent is looming large: Mother Nature. Climate change is bound to create constraints, incentives and requirements that will force governments, corporations and consumers to drastically alter their ways. The world will urgently need disruptions in the politics, institutions, economics and technologies of energy. And will need them sooner than most people expect. That is the disruption for which we should be preparing.