I’m dissatisfied with the term Energy Transition. Everyone’s doing it, but they’re all doing something different. So, I’ve been working on a framework for describing what’s going on.
Much of my network is concerned with Oil and Gas and there is this term “Energy Transition” banded about. Which it seems they define as –
“What we are doing now won’t work in the future. Let’s find ways to apply our skills to ANYTHING new and hey-presto, that must be energy transition”
As a definition it is not helpful. So I am looking for a different way of classifying things. This is what I have so far.
Firstly, I took the word Energy and examined it. That led me to realise that it is really one of a few “meta-industries” that provide the fundamental requirements for our world. Energy being one. Others include things such as Shelter, Food and, Transport. Each of these meta-industries have alternative outputs which can be used to provide their utility. For instance, Energy, output can be fulfilled by Oil, Gas, Coal, Electricity, etc. You get the picture. It’s the same for the others meta-industries.
Meta Industries in transition
Each Meta industry has alternative outputs which are, somewhat, interchangeable and can achieve the primary goal of supply.
Each of these alternatives outputs have a supply chain of interconnected industries that will be impacted by a switch between alternatives. Such a switch will also require modification of consumption activities. i.e. switching more of the Meta Industry “Energy” output from Oil to Electricity requires electric vehicles, which require batteries etc.
I think talking about working in “Energy Transition” is almost meaningless. Energy Transition is an outcome created by other activities. These activities are things you can work on. Energy Transition is not a thing in itself but a description of what happened. It would be the equivalent of saying you work in “Energy Profitability”.
Working Up, Working Down
This thinking has led me to a framework around each alternative supply chain (working down) and from each “traditional” industry (working up).
To explain, the Oil Industry is a component of the “Energy” supply chain, but is also a component of the “Fertiliser” supply chain which is part a “Food” Meta Industry output alternative.
It is difficult to analyse the “oil industry” in isolation as it gets caught up in all it’s supply chains from energy to chemicals to road construction to transportation. I propose that we can simplify the analysis by looking down from a fundamental Energy Meta Industry.
There are 4 Industry groups impacted in a transition between alternative outputs of a Meta Industry. E.g. the switch from Oil to Electricity.
- A: Industries that will cease to be needed
- B: Industries that mitigate the impact of (A) industries until they do
- C: Industries that will replace them
- D: Industries that do not need to change at all
Industries that die and ones that help them pass peacfully
The (A) industries are unwelcome but necessary for a while. The goal should be to make them obsolete as soon as possible.
This removal creates economic opportunity:
- To reduce the environmental impact until they do (for instance by reducing unnecessary emissions)
- As facilities are removed from service, activities for dismantling the infrastructure will flourish
- Professional services for financing, operating, and advising in this space.
The reducing capacity of (A) industries will lead to reduced scale economies and higher cost of capital.
Temporary mitigating industries emerge
The (B) industries are temporary, they will somehow clean up the unavoidable impact that (A) industries have until they are closed down. Carbon scrubbers that sort of thing.
The doom-spiral for doomed industries
Even if they are doomed, (A) industry projects will still be required to be around for a time. But they will also need to execute unpopular projects with loads of political risk. They will have higher cost of capital. They will carry increased costs from compliance, regulatory charges, and penalties. They will need to pay for a new input cost – (B) industries. They will have higher operational costs. They will find it hard to recruit and retain staff so labour costs will increase. These increased costs will lead to increased output prices. This will cause further reduction in demand for their product. Scale economies will kick in for competitive substitutes. It will become a downward spiral for the old, and an upward whirlwind for the new.
New industries emerge as innovation accelerates
The (C) industries are the up and coming replacements. They will likely be easier to finance, enjoy tax breaks and subsidies. They will also benefit from scale-up, learning economies and rapid innovation. They are likely to employ modern technology such as autonomous vehicles, AI, 3D printing and big data from the start. They will be the foundation of the 4th industrial revolution.
Some things stay the same
The (D) industries are the ones with very little impact on the environment that don’t need to change in this Meta Supply chain. But may be impacted by due to interference from other Meta Industry transitions.
Meta Industries need to be analysed seperately
This lens applies to all the Meta Industries, and can help disentangle the analysis.
Of course there are interconnected implications, because if the Oil Industry is a type (A) industry for energy, it may be type (D) for, say, fertiliser manufacturing. So even if it is eliminated from the Energy Meta Industry, it may not be from the Food one. But the implications of the changing cost of production may have interesting implications for fertiliser pricing and availability.
Two brand new Meta Industries
On top of this there are two more new Meta Industries. These meta industries don’t seem to function well with our current rules, regulations, incentives and rewards. To get them to function we’ll need some changes to the economic rules of the game.
Meta Industry 1: Coping with Climate Change. As sea levels rise and storms increase there will be activities required to deal with this. From insurance, to design, to retro-fit conversions, to disaster recovery. Meta Industry Output is “resilience”.
Meta Industry 2: Cleaning the biosphere. There are technologies being worked on that can remove harmful gasses from the air, can rehabilitate rain forests, rewild habitats etc. Meta Industry Output is “Biosphere Maintenance”
The problem with these two Meta industries is that it’s not clear who would pay. In an individualist capitalist society it is in no one person’s interest to pay for this, but we will all benefit from it if it occurs. We have moved away from socialist policies for the common good for a long time, but maybe these industries will require us to return to them – and on a global scale.
2 thoughts on “Framing Energy Transition”
Thanks Gareth – interesting thoughts. It’s clearly a very complicated picture! Especially when one throws in curveballs like COVID and Ukraine to really mess with peoples investment plans!
Well I think this complication is what’s causing the confusion – it’s all so intertwined, making any change requires unpicking the seems of modern industrial world and then restitching them, but each time one bit of change arrives there is an “ah but….” moment that leads to inertia. And goodness knows, all the capital intensive industries can be very slow to change if they can possibly avoid it or kick it to the long grass.
To get change will require targetting the things that really matter and then dealing with the consequences, however unpleasant they are in the short-run.
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