Looking back to look forward - Energy Institute


Courtesy of Energy Institute (EI)

In 2014 we are celebrating the 100th anniversary of the founding of the oldest of the Energy Institute’s predecessor organisations. We will be publishing throughout the year interviews with eminent figures from the world of energy, reflecting on how the past can inform the future. This month, Dr Jeremy Leggett FEI comments from his perspective as a leader in the solar energy industry.

From your own perspective, how would you characterise the key challenges facing the energy industry and society today? A. As potentially existential, in two ways. If society stays locked into the carbon fuel-based energy status quo, or anything close to it, we will lose our ability to feed ourselves, run out of potable water, increase the risk of wars, and cause the very fabric of civilisation to crash as a consequence of the climate change this global overheating will cause. This is no overstatement of the road to 4–6°C or more of global warming that we are currently on.

If the energy incumbency – the companies dealing in carbon fuels and nuclear, and their supporters in financial, political and civil service institutions – stays with the status quo, whether the foregoing assertions about climate change are correct or not, it faces existential threat because its business models will prove increasingly invalid. For example, analysts at McKinsey, Alliance Bernstein and other such places say that the systemic cost reductions in manufacturing and installing solar amount to what some are now calling a ‘terrordome’ for the business models of traditional energy utilities. These oldworld companies are, as a result, in such trouble that they may even be in what analysts have started to call a ‘death spiral’.

Such graphic language, I emphasise, has not been introduced by green campaigners, but by analysts. These analysts say the solar cost down trend will continue, increasingly being augmented by cost reductions in storage technology, to such an extent that that the business models of the oil and gas industry will soon begin to be undermined too, even when it comes to oil use in non-aviation transport. This is so even at the tiny levels of penetration clean energy currently has in global primary energy. We are talking about very disruptive technologies. The key challenges, then, are around recognition of the threats I have described, and reacting to them. And here we humans have a big hurdle to overcome. Neuroscientists are discovering that we are prone to what they call ‘predictable irrationality’. This tendency extends to entrenched belief in what we possess, even if an alternative ought rationally to be viewed as an improvement. This ‘incumbency effect’ in our thinking is compounded by a definite preference for comfortable narratives over uncomfortable ones.

How can we use the experience of the past to plot the future?
A. In defending the status quo, the energy incumbency makes mistakes in a recurrent, enculturated, risk-blind way. In this, they increasingly remind me of another incumbency, that of investment banking, in the run up to the financial crisis of 2008. That incumbency sold society a narrative of new, low-risk assets that were a way to build a whole new class of prosperity. They hyped this story to the rafters. We all know now how much substance it held.

Today, we are told that we can burn all their oil and gas resources and still have a safe climate. We are told that there is precisely zero risk of any of those assets being stranded by policymakers, and there is denial that investors will increasingly put pressure on capital expenditure because they are becoming more aware of the ‘risks’ of climate and clean air policymaking, as a result of the work of Carbon Tracker and others.

We are told that the US ‘shale boom’ entails no risk of turning out to be yet another bust, and indeed that it will prove profitably exportable to other countries yet to frack a single molecule of gas. We are told there is no risk of global oil supply failing tomeet demand, engendering a third global oil crisis. We are told that peak oil is dead, and even in some cases that oil and gas supplies are ‘infinite’. Anyone who posits a counter narrative is accused of scaremongering, just as Lehman Brothers and the rest did in 2006.

This is wrong on every count, I believe. And I am far from alone in thinking that. In the run up to financial crash, not a single person within the incumbency blew a whistle that I know of. In the run up to the coming energy crash, there are a good few key figures within the energy incumbency who think much as I do.

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